Dropping or Retaining a Tour A study has indicated that some of the bus tours op

Question

Dropping or Retaining a Tour

A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not profitable. As a result, consideration is being given to dropping these unprofitable tours to improve the company's overall operating performance.

One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below.

The following additional information is available about the tour:

Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.

The "Bus maintenance and preparation" cost in the statement 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.

Ticket revenue (100 seat capacity X 40% occupancy X

$70 ticket price per person)                                          $2,800            100%

Variable expenses ($21.00 per person)                          840 30     

Contribution margin                                                                        1,960            70%

Tour expenses:

Tour promotion                                                                   540            

Salary of bus driver                                                           320

Fee, tour guide                                                                   630

Fuel for bus                                                                        110

Depreciation of bus                                                           410

Liability insurance, bus                                                    180

Overnight parking fees, bus                                              50             

Room and meals, bus driver and tour guide                             160

Bus maintenance and preparation                                 270

Total tour expenses                                                       2,670

Operating loss                                                                $(710)           

Depreciation of buses is due to obsolescence.

Liability insurance premiums are based on the number of buses in the company's fleet.

Dropping the Majestic Islands bus tour would not allow Clear Water 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:

Prepare an analysis showing what the impact will be on the company's profits if this tour is discontinued.

The company's tour director has been criticized because only about 50% of the seats on Clear Water's tours are being filled, compared to an industry average of 60%. The tour director has explained that Clear Water'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 $540.00 Fee, tour guide $630.00 Fuel for bus $110.00 Overnight parking fee, bus $50.00 Room and meals, bus driver and tour guide $160.00 Total Avoidable Costs: $1,490.00 Lost contribution margin: $1,960.00 Since the total avoidable costs of 1490 would increase profits by 1490 and the lost contribution margin of 1960 would decrease profits by 1960, the net effect is a decrease in profit of $470. Answer: Profits decrease by $470. If The company Drop tour with lower than Average Seat occupancy . It Could Increase it Average seat Occupancy. However, if the tour that are elimiated have positive contribution margin , it will reduce the company's profit. Additionally Some of these Tours Could act as the gateway in getting Customer Interested in more Profitable Tours.

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