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You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a 3-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. A lot of business is done on a referral basis, where a company pays a fee to a 3rd party to send them customers. However, because of your well-established reputation, you already have received requests for “flights” to be scheduled as soon as you open the new location. Therefore, you expect to break-even the first year but must calculate the number of flights needed. You also need to determine the new break-even point in Year 2 if the location allows referrals, which you believe will cost on average about 2% of the sales price overall. Finally, you need to determine the volume needed to have $10,000 in profit in Year 3. The following information is available:

Sales price per flight $175
Estimated loan payment per month $350
Fuel costs per flight $100
Full-time scheduler salary $2,500 per month
Boat crew per flight $30
$500 per month dock fee and use of a small office on a pier

Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio. Explain how the values were determined.
Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio. Explain how the values were determined.
Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3, assuming the company does allow for referrals.
Recommend if the bank should issue the loan.

Sagot :

bharathparasad577

YEAR 1-

  • Contribution margin = sales price per flight- Variable cost per flight

                                    = $175 - ($100+ $30)

                                    = $45

  • Annual fixed cost = (Loan payment + Schedule salary+ dock fees) times 12months

                               = ($350+ $2500+ $500)*12

                               = $40200

  • Break even quantity = Annual fixed cost / contribution per flight

                                   = $40200/ $45

                                   =893 flights (Approx)

  • Contribution margin ratio = (contribution per flight/ sales per flight)*100

                                             = ($45/$175)*100

                                             = 25.71%

  • Contribution margin= $40200

YEAR 2

  • Break even quantity= $40200/ $41.5

                                   = 968 flights (approx)

          Contribution per flight= $175- ($100 + $30+ {175* 2%})

                                                 = $41.5

  • Contribution margin ratio= ($41.5/ $175)* 100

                                                     = 23.71%

YEAR 3

  • No of flights needed to retain profit of $10000

No of flights needed = (fixed cost + profit)/ contribution per flight

                                     = ($40200 + $10000)/$45

                                     = 1115 flights needed (approx)

Yes bank should issue the loan.

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