Royal Holland is a cruise ship company. It currently has six ships and plans to add two more. It offers luxury passenger cruises in the Caribbean, Alaska, and the Far East. Management is currently addressing what to do with an existing ship, the S.S. Amsterdam, when she is replaced by a new ship.
The S.S. Amsterdam was built 20 years ago for $100 million. For accounting purposes, she was assumed to have a 20-year life and hence is now fully depreciated. To replace the S.S. Amsterdam would cost $500 million, but her current market value is $371,250,000. The Holland Line can borrow or lend money at 10 percent.
The S.S. Amsterdam is now sailing the Caribbean and will be replaced next year by a new ship. The S.S. Amsterdam might be moved to the Mediterranean for a new seven-day Greek island tour. A seven-day cruise would depart Athens Sunday night, stop at four ports before returning to Athens Sunday morning, and prepare for a new cruise that afternoon. The S.S. Amsterdam can carry as many as 1,500 passengers.
The accompanying data summarize the operating cost for this seven-day cruise.
Estimated Operating Cost of Seven-Day Greek Island Cruise (S.S. Amsterdam)
| Variable Cost* | Fixed Costf | |
| Labor | $ 60,000 | $ 80,000 |
| Food | 236,000 | 10,500 |
| Fuel | 177,000 | |
| Port fees and services | 62,000 | |
| Marketing, advertising, promotion | 240,000 | |
| Supplies | 28,000 | 38,000 |
| Totals | $324,000 | $607,500 |
*Based on 1,200 passengers.
tFixed costs per weekly cruise. Assume there are 50 weeks (and hence 50 cruises) in a year.
Required:
a. Assuming the seven-day Greek island cruise can be priced at an average of $1,620, calculate the break-even number of passengers per cruise using the data provided.
b. What major cost component is not included in management’s estimates?
c. If you were to include the omitted cost component identified in (b), recalculate the breakeven point for the S.S. Amsterdam’s Greek island cruise.
d. Passengers purchase beverages, souvenirs, and services while on the ship. The ship makes money on the purchases. If the ship line has a margin of 50 percent on all such on-board purchases, how much would the average passenger have to purchase for the break-even point to be 900 passengers?
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