Question

Bristol Car Service offers airport service in a mid-size city. Bristol charges $30 per trip to or from the airport. The variable cost for a trip totals $18, for fuel, driver, and so on. The monthly fixed cost for Bristol Rainbow Tours is $1,800.

Required:

a. How many trips must Bristol sell every month to break even?

b. Bristol's owner believes that 160 trips is a reasonable forecast of the average monthly demand. What is the margin of safety in terms of the number of airport trips?

Answer 1

a. CALCULATION OF NO. OF TRIPS TO BE SELL EVERY MONTH TO ACHIEVE BREAK-EVEN POINT:

SALES PRICE PER TRIP	$30
LESS: VARIABLE COST PER TRIP	$18
CONTRIBUTION PER TRIP	$12

BREAK EVEN POINT(IN TRIPS) = FIXED COST / CONTRIBUTION PER TRIP

= $1800 / $12

= 150 TRIPS

b. INCOME STATEMENT

PARTICULARS	DETAILS	AMT($)
SALES	160 x 30	4800
LESS: VARIABLE COST	160 x 18	(2880)
CONTRIBUTION		1920
LESS: FIXED COST		(1800)
PROFIT		120

MARGIN OF SAFETY (NO. OF TRIPS) = PROFIT / CONTRIBUTION PER TRIP

= 120 / 12

= 10 TRIPS

OR

MARGIN OF SAFETY (NO. OF TRIPS) = NO. OF TRIP SELL (-) BREAK EVEN POINT(IN TRIPS)

= 160 (-) 150

= 10 TRIPS