Reference no: EM132572253

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:

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

b. 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)

c. Depreciation of buses is due to obsolescence.

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

e. 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:

Question 1. Make an analysis showing what the impact will be on the company's profits if this tour is discontinued.

Question 2. 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.