Zoom P10-18A Given P10-18A P10-21A ) IA BLUELINE TOURS, INC Analysis of Disconti

Question

Zoom P10-18A Given P10-18A P10-21A ) IA BLUELINE TOURS, INC Analysis of Discontinuing Tour Contribution margin lost if the tour is discontinued 14 15 6 Net decrease in profits if the tour is discontinued 18 19 20 BLUELINE TOURS, INC. Alternative Analysis of Discontinuing Tour Difference: Operating Income Increase or (Decrease 23 24 25 the Tour Drop the Tour 26 3,000 900 2,100 27 Ticket revenue 28 29 Contribution margin 0 Less tour expenses: 31 Tour promotion 32 33 Fee, tour guide 34 35 36 Liability insurance, bus 37 Overnight parking fees, bus 38 Room & meals, bus driver and tour guide 39 Bus maintenance and preparation 40 Total tour expenses 41 Net operating loss Less variable expenses 600 350 700 125 450 200 50 175 300 2,950 (850) Salary of bus driver Fuel for bus Depreciation of bus 43

Explanation / Answer

Analysis of discontinuing tours

Assumptions-

1. Bus driver is assumed to be the permanent employee of tour company. Hence, he will get his salary even if tour is discontinued.

2. Above expenses are directly linked to the tour activity (Relevant costs). Therefore avoided if tour is discontinued.

3. Depreciation, liability insurance and maintenance and preparation expenses are in the nature of fixed cost. That is, it will occur irrespective of tour undertaken.

4. Even when the tour is undertaken, there are losses. So, the above solution is based taking into account the relevant costs.

Contribution margin lost if the tour is discontinued $2100 Less- Tour costs that can be avoided if the tour is discontinued Tour promotion $600 Fee, tour guide $700 Room and meals for bus driver and tour guide $175 Overnight parking fee $50 Fuel for bus $125 Total (Note 2 below) $1650 Net decrease in profits if the tour is discontinued $450

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