Assignment
Blueline Tours, Inc., operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the company's overall operating performance.
One such tour is the two-day Historic Mansion Tour is conducted by bus in the southern states. An income statement from a typical Historic Mansions Tour is given below:
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Ticket revenue (100 seat capacity x 40% occupancy x $75 ticket price per person
|
$3,000
|
100%
|
|
Variable expenses ($22.50 per person)
|
900
|
30%
|
|
Contribution margin
|
2,100
|
70%
|
|
Tour expenses:
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|
|
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Tour promotion
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$600
|
|
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Salary of bus driver
|
350
|
|
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Fee, tour guide
|
700
|
|
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Fuel for bus
|
125
|
|
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Depreciation of bus
|
450
|
|
|
Liability insurance, bus
|
200
|
|
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Overnight parking fee, bus
|
50
|
|
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Room and meals, bus driver and tour guide
|
175
|
|
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Bus maintenance and preparation
|
300
|
|
|
Total tour expenses
|
2,950
|
|
|
Net operating loss
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$(850)
|
|
The following additional information is available about the tour:
a) Bus drivers are paid annual fixed salaries; tour guides are paid for each tour conducted.
b) The "Bus maintenance and preparation" cost 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.
c) Liability insurance premiums are based on the number of buses in the company's fleet.
d) Dropping the Historic Mansions Tour would not allow Blueline 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:
1) Prepare an analysis showing what the impact will be on the company's profits if this tour is discontinued.
2) The company tour director has been criticized because only about 50% of the seats on Blueline's tours are being filled as compared to an industry average of 60%. The tour director has explained that Blueline'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.