Dropping or Retaining a Tour
A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not profitable. As a result, consideration is being given to dropping these unprofitable tours to improve the company's overall operating performance.
One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below.
The following additional information is available about the tour:
Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
The "Bus maintenance and preparation" cost in the statement is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.
Ticket revenue (100 seat capacity X 40% occupancy X
$70 ticket price per person) $2,800 100%
Variable expenses ($21.00 per person) 840 30
Contribution margin 1,960 70%
Tour expenses:
Tour promotion 540
Salary of bus driver 320
Fee, tour guide 630
Fuel for bus 110
Depreciation of bus 410
Liability insurance, bus 180
Overnight parking fees, bus 50
Room and meals, bus driver and tour guide 160
Bus maintenance and preparation 270
Total tour expenses 2,670
Operating loss $(710)
Depreciation of buses is due to obsolescence.
Liability insurance premiums are based on the number of buses in the company's fleet.
Dropping the Majestic Islands bus tour would not allow Clear Water Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.
Required:
Prepare an analysis showing what the impact will be on the company's profits if this tour is discontinued.
The company's tour director has been criticized because only about 50% of the seats on Clear Water's tours are being filled, compared to an industry average of 60%. The tour director has explained that Clear Water's average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.
Dropping or Retaining a Tour
A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not profitable. As a result, consideration is being given to dropping these unprofitable tours to improve the company's overall operating performance.
One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below.
The following additional information is available about the tour:
Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
The "Bus maintenance and preparation" cost in the statement is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.
Ticket revenue (100 seat capacity X 40% occupancy X
$70 ticket price per person) $2,800 100%
Variable expenses ($21.00 per person) 840 30
Contribution margin 1,960 70%
Tour expenses:
Tour promotion 540
Salary of bus driver 320
Fee, tour guide 630
Fuel for bus 110
Depreciation of bus 410
Liability insurance, bus 180
Overnight parking fees, bus 50
Room and meals, bus driver and tour guide 160
Bus maintenance and preparation 270
Total tour expenses 2,670
Operating loss $(710)
Depreciation of buses is due to obsolescence.
Liability insurance premiums are based on the number of buses in the company's fleet.
Dropping the Majestic Islands bus tour would not allow Clear Water Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.
Required:
Prepare an analysis showing what the impact will be on the company's profits if this tour is discontinued.
The company's tour director has been criticized because only about 50% of the seats on Clear Water's tours are being filled, compared to an industry average of 60%. The tour director has explained that Clear Water's average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.
Related questions
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companyâs performance, the company is thinking about dropping several flights that appear to be unprofitable.
A typical income statement for one round-trip of one such flight (flight 482) is as follows:
| Ticket revenue (115 seats à 40% occupancy à $60 ticket price) | $ | 2,760 | 100.0 | % | ||
| Variable expenses ($14.00 per person) | 644 | 23.3 | ||||
| Contribution margin | 2,116 | 76.7 | % | |||
| Flight expenses: | ||||||
| Salaries, flight crew | $ | 340 | ||||
| Flight promotion | 710 | |||||
| Depreciation of aircraft | 530 | |||||
| Fuel for aircraft | 200 | |||||
| Liability insurance | 210 | |||||
| Salaries, flight assistants | 680 | |||||
| Baggage loading and flight preparation | 185 | |||||
| Overnight costs for flight crew and assistants at destination | 70 | |||||
| Total flight expenses | 2,925 | |||||
| Net operating loss | $ | (809 | ) | |||
The following additional information is available about flight 482:
Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete.
One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a âhigh-riskâ area. The remaining two-thirds would be unaffected by a decision to drop flight 482.
The baggage loading and flight preparation expense is an allocation of ground crewsâ salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the companyâs total baggage loading and flight preparation expenses.
If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.
Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.
Profits have been decreasing for several years at PegasusAirlines. In an effort to improve the companyâs performance,consideration is being given to dropping several flights thatappear to be unprofitable. |
| A typical income statement for oneround-trip of one such flight (flight 482) is as follows:
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