Question

1. Merry, the Knight is a bookstore specializing in J. R. R. Tolkien and other fantasy literature. Recently, the bookstore has taken on a side business in New Zealand, package tours of the places where the filming for the movie trilogy took place. The first two years results follow being a peak and lull year, and about the high and low ends of operating capacity: 2018 2017 Year Sales in units (tours) 4500 3500 Sales Revenue ($ 5,000 per tour)Fx d $ 17,500,000 $22,500,000 Expenses Travel costs $2,950,000 $3,450,000 Meals and lodging Guide salaries, and expenses 5,250,000 6,750,000 4,950,000 5,650,000 Insurance FIYed 1,500,000 1,500,000 Advertising 2,000,000 2,000,000 Net Operating Income $ 3,150,000 $ 850,000 The budget is being written up for the 2019 season, and the expected number of tours sold is 4200. In order to estimate net operating income for 2019, an analysis of the costs of doing business so far needs to be done. Assuming that the last two years costs can be used (they are typical), identify each of the company's expenses as either a pure variable, a mixed, or a fixed expense. Using the hi-lo method, separate each of the mixed expenses into fixed and variable elements. Redo the company's expense totals (for all the expenses separately) at the 4200 units sales level, and use it to estimate net operating income. Finally, a manager asked the accounting staff, at 6000 units sold, what would you estimate the total travel costs at? Respond appropriately.

Answer 1

Travel Costs :- (Mixed Cost)

Variable cost per tour = ($3450000 - $2950000)/(4500-3500)

= $500000 / 1000

= $500 per tour

Fixed Cost = $3450000 - (4500*$500)

= $3450000 - $2250000

= $1200000

Meal and lodging :- (Variable Cost)

Per tour Cost = $5250000 / 3500 = $1500 per tour

Guide Salaries and Expenses :- (Mixed Cost)

Variable Cost Per Tour = ($5650000 - $4950000)/(4500-3500)

= $700000 / 1000

= $700 per tour

Fixed Cost = $4950000 - ($700 * 3500)

= $4950000 - $2450000

= $2500000

Insurance and Advertising are Fixed Cost.

Calculation of Estimate Net Operating Income for 2019 at 4200 tours :-

Particulars	Amount($)
Sales Revenue (4200*$5000)	21000000
Less : Expenses
Travel Cost ($1200000 + (4200*$500))	(3300000)
Meals and Lodging (4200*$1500)	(6300000)
Guide Salaries and Expenses ($2500000+(4200*$700))	(5440000)
Insurance	(1500000)
Advertising	(2000000)
Net Operating Income	2460000

Estimate Travel Cost at 6000 tours :-

= $1200000 + (6000*$500)

= $1200000 + $3000000

= $4200000