Wildlife Escapes generates average revenue of $6,250 per person on its 5-day pac
ID: 2337413 • Letter: W
Question
Wildlife Escapes generates average revenue of $6,250 per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows:
Airfare
$1,100
Hotel accommodations
1,950
Meals
900
Ground transportation
600
Park tickets and other costs
700
Total
$5,250
Annual fixed costs total $590,000.
1.
Calculate the number of package tours that must be sold to break even.
2.
Calculate the revenue needed to earn a target operating income of $92,000.
3.
If fixed costs increase by $29,500, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1?
4.
The general manager at Wildlife Escapes proposes to increase the price of the package tour to $7,750 to decrease the breakeven point in units. Using information in the originalproblem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?
1.
Calculate the number of package tours that must be sold to break even.
2.
Calculate the revenue needed to earn a target operating income of $92,000.
3.
If fixed costs increase by $29,500, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1?
4.
The general manager at Wildlife Escapes proposes to increase the price of the package tour to $7,750 to decrease the breakeven point in units. Using information in the originalproblem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?
Explanation / Answer
(1) - Number of package tours that must be sold to break even.
Break Even (Packages) = Total Fixed Costs / Contribution margin per package
Contribution margin per package = Revenue per package – Variable costs per package
= $6,250 + 5,250
= $1,000 per package
Contribution Margin Ratio = [$1,000 / 6,250] x 100 = 16%
Break Even (Packages) = Total Fixed Costs / Contribution margin per package
= $590,000 / $1,000
= 590 Tour Packages
(2) - Revenue needed to earn a target operating income of $92,000
Required Revenue to earn income of $92,000 = [Fixed costs + Desired Income] / Contribution Ratio
= [$590,000 + 92,000] / 0.16
= $682,000 / 0.16
= $42,62,500
(3) – Decrease in the Variable cost per person
If the fixed costs increased by $29,500, then the variable costs need to be reduced by $29,500 in order to maintain the break-even tour packages of 590 packages
Therefore, the required decrease in the variable costs per person is calculated as follows
The required decrease in the variable costs per person = Reduction in variable costs / Break even packages
= $29,500 / 590 packages
= $50 per person
(4) – New Break Even points in units
New Contribution per unit = New Revenue per person – Variable costs per person
= $7,750 - 5,250 per person
= $2,500 per person
Therefore, The New Break Even points in units = Total Fixed cost / New contribution per person
= $590,000 / $2,250 per person
= 236 Tour Packages
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