Using data below prepare an analysis (differential/product line) showing what th

Question

Using data below prepare an analysis (differential/product line) showing what the impact will be on the company's profits if this tour is discountinued.
Ticket Revenue $3,000 100%
(100 seatX40% occ x $75 price)
Variable Expenses ($22.50 per person) 900 30
Contribution Margin 2,100 70
Tour Expenses:
Promotion 600
Salary of driver 350
Fee, tour guide 700
Fuel 125
Depreciation 450
Liability Ins 200
Overnight Parking 50
Room and Meals 175
Bus maintenance and prep 300
Total Tour expenses 2,950
Net Operating Loss (850)

Bus drivers are paid fixed salaries (350), guides paid per tour (700). Depreciation (450) is due to obsolescense - wear and tear is negligible. Liability ins (200) is based on # of busses in fleet. Dropping Historic Mansions bus tour would not allow Blueline Tours to reduce the # of buses in fleet, the # of drivers, or the size of maint and prep staff.


The company's tour director has been criticized because only about 50% of the seats on the 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.

Explanation / Answer

Tour expenses that would be avoidable: Tour promotion $600 Fee, tour guide 700 Fuel for bus 125 Overnight parking fee, bus 50 Room and meals, bus driver and tour guide 175 Total Avoidable Costs: 1650 Lost contribution margin: 2100 Since the total avoidable costs of 1650 would increase profits by 1650 and the lost contribution margin of 2100 would decrease profits by 2100, the net effect is a decrease in profit of $450. Answer: Profits decrease by $450.

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