Question

Submit a paper which is 2-3 pages in length (no more than 4-pages), exclusive of the reference page. The paper should be double spaced in Times New Roman (or its equivalent) font which is no greater than 12 points in size. The paper should cite at least three sources in APA format. One source can be your textbook.

In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a 3-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. A lot of business is done on a referral basis, where a company pays a fee to a 3rd party to send them customers. However, because of your well-established reputation, you already have received requests for “flights” to be scheduled as soon as you open the new location. Therefore, you expect to break-even the first year but must calculate the number of flights needed. You also need to determine the new break-even point in Year 2 if the location allows referrals, which you believe will cost on average about 2% of the sales price overall. Finally, you need to determine the volume needed to have $10,000 in profit in Year 3. The following information is available:

• Sales price per flight $175
• Estimated loan payment per month $350
• Fuel costs per flight $100
• Full-time scheduler salary $2,500 per month
• Boat crew per flight $30
• $500 per month dock fee and use of a small office on a pier

Requirements:

• Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio. Explain how the values were determined.
• Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio. Explain how the values were determined.
• Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3, assuming the company does allow for referrals.
• Recommend if the bank should issue the loan.

Superior papers will:

Perform all calculations correctly.

• Articulate the approach to solving the problem.
• Explain the relationship of the costs to the concept of contribution margin.
• Discuss any limitations of the data, including what may be missing.
• Conclude on whether the bank should issue the loan.

Answer 1

Variable cost
Fuel costs per flight	$100
Boat crew per flight	$30
Total	$130
here this both cost are variable cost because it change as per flight like if flight run , cost will incurr, and if flight will not run cost will not incurr

Fixed cost	$
Estimated loan payment per month $350 *12	4200
Full-time scheduler salary $2,500 per month *12	30000
500 per month dock fee and use of a small office on a pier *12	6000
	$40200

1) Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio

Break-even quantity      =    Annual Fixed Cost / Sales price - variable

=40200/175-130 = 893 Flights (Approx)

Contribution Margin Ratio =   (sales price -variable cost per Flight / Sales price per Flight)* 100

       =   ($175-130 / $175) *100

       =    25.71 %

2) Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio

we have given in the question new break-even point in Year 2 if the location allows referrals, which you believe will cost on average about 2% of the sales price overall means cost will increses 2% of sales price . so 175*2% =3.5 so the total cost will be 130+3.5 = 133.5

Break-even quantity      =    Annual Fixed Cost / Sales price - variable

=40200/175-133.5 = 969 Flights (Approx)

Contribution Margin Ratio =   (sales price -variable cost per Flight / Sales price per Flight)* 100

       =   ($175-133.5 / $175) *100

       = 23.71 %

Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3

No. of Flights needed    =   (Fixed Cost + Profit) / Sales price - variable cost per flight

                                              =   ($40,200 + $10,000) / $41.5

                                              =   1,209 Flights (Approx)

Bank issue the loan to any company when bank confirm that , company is able to pay banks loan or not , here in the given question co.is able to pay bank loan , because loan payment cost is fixed cost and company cover it's all fixed cost and can make profit . So bank should issue the loan.

Here limitation is that question given sale price for year but not given the number of flights run in year .