You are considering offering a 5-day kayak trip next summer at a price of $390 p

Question

You are considering offering a 5-day kayak trip next summer at a price of $390 person. If it is successful, you may add more trips in the future. You have determined that if you run the trip, there will be no increase in the amount you currently pay for rent, utilities, supplies, depreciation and loan service. However, your insurance would go up by $400 (regardless of how many few people go on the trip), and you would spend $1,000 marketing this tour. Moreover, you expect transportation for the trip to cost you $100 regardless of how many people go on the trip since you will be transporting them in your shuttle vehicle (an old school bus). Because you don't want this tour to interrupt your kayak rental business, you have made a deal with your kayak supplier to rent kayaks to you for the trip at a rate of $75/kayak. This rate includes all kayak supplies (e.g., paddles, skirts. PFDs. helmets) and delivery. Moreover, they can provide as many/few as you need since they want these trips to be successful because more trips would likely lead to more kayak sales. You have determined that you want to have 1 staff member for every 5 participants, and you will pay these staff members $250 each for the trip. You will provide one kayak/person (participants and staff), and you have made an arrangement with a local college's Wilderness Outfitter's Office to rent all camping supplies (tents, sleeping bags, cooking supplies, etc...) for a rate of $25/person (assume your staff will be using this gear). Additionally, you have determined that food for the trip will cost $100 person. Assuming that these are the only costs for this trip, and there is no limit on the number of people you can bring on the trip, calculate the following: How many people do you need to sign up for the trip before you begin to make a profit? How much profit loss would you have if 20 people signed up? Would you be better off or worse off if 21 people signed up? Why?

Explanation / Answer

Calculation of Relevant Fixed Costs Insurance $400 Marketing $1,000 Transportation $100 $1,500 Calculation of Relevant Semi Variable Costs Staff (1 for 5 participants) $250 Cost per people (250/50) $50 Calculation of Relevant Variable Costs Kayak Rent $75 Camping Supplies $25 Food $100 Calculation of Initial Break even point Revenue per person $390 Less: Variable and Semi Var Cost per person $250 Contribution per person (a) $140 Fixed Cost (b) $1,500 Break Even Point (b/a) 10.71 # persons (a) 10 11 12 13 14 15 16 17 18 19 20 21 Total Revenue (b = a * $390) $3,900 $4,290 $4,680 $5,070 $5,460 $5,850 $6,240 $6,630 $7,020 $7,410 $7,800 $8,190 # Staff Required (c = a/5) 2 3 3 3 3 3 4 4 4 4 4 5 Staff Cost (d = c * $250) $500 $750 $750 $750 $750 $750 $1,000 $1,000 $1,000 $1,000 $1,000 $1,250 Kayak Rent (e = a+c * $75) $900 $1,050 $1,125 $1,200 $1,275 $1,350 $1,500 $1,575 $1,650 $1,725 $1,800 $1,950 Camping Supplies (f = a+c * $25) $300 $350 $375 $400 $425 $450 $500 $525 $550 $575 $600 $650 Food (g = a* $100) $1,000 $1,100 $1,200 $1,300 $1,400 $1,500 $1,600 $1,700 $1,800 $1,900 $2,000 $2,100 Insurance (h) $400 $400 $400 $400 $400 $400 $400 $400 $400 $400 $400 $400 Marketing (i) $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 Transportation (j) $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 $100 Total Cost (k = d+e+f+g+h+i+j) $4,200 $4,750 $4,950 $5,150 $5,350 $5,550 $6,100 $6,300 $6,500 $6,700 $6,900 $7,450 Profit (b - k) ($300) ($460) ($270) ($80) $110 $300 $140 $330 $520 $710 $900 $740 a. Minimum people required for trip = 14 b. Profit when there are 20 people = $900 c. At 21 people, I would be worse off as overall profitability falls from $ 900 to $ 740. This because an additional staff needs to hired whose cost is $250 plus $100 would be spend additionally on staff for Kayak and Camping supplies which increase the cost to $350. Revenue for additional person will be $390 and relevant costs that would be incurred are $ 200 for kayak, camping supplies and food. Hence, Net loss from incremental person would be $390 -$200 - $350 = $160 and this is essentially the same amount by overall profit falls.

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