Lakeshore Tours Inc., operates a large number of 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 in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below:
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Ticket revenue
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(100 seats × 45% occupancy × $80 ticket price)
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$3,600
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100%
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Less variable expenses ($24 per person)
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1,080
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30%
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Contribution margin
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2,520
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70%
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Less fixed tour expenses:
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Tour promotion
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$620
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Salary of bus driver
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400
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Fee, tour guide
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825
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Fuel for bus
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100
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Depreciation of bus
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400
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Liability insurance, bus
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250
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Overnight parking fee, bus
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50
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Room and meals, bus driver and tour guide
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75
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Bus maintenance and preparation
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325
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Total fixed tour expenses
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3,045
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Net operating loss
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$ (525)
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Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above 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. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used.
Required:
a. Prepare an analysis showing what the impact will be on company profits if this tour is discontinued.
b. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Explain your response.