Question

1. Shorelake Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the Native American and Francophone Wars bus tour. An income statement from one of these tours is given below:
   

	Ticket revenue (100 seats x 45% occupancy x $80 ticket price)		$3,600	100%
	Variable expenses ($24 per person)		1,080	30%
	Contribution margin		2,520	70%
	Fixed tour expenses:
	Tour promotion	$620
	Salary of bus driver	400
	Fee, tour guide	825
	Fuel for bus	100
	Depreciation of bus	400
	Liability insurance, bus	250
	Overnight parking fee, bus	50
	Room and meals, bus driver and tour guide	75
	Bus maintenance and preparation	325
	Total fixed tour expenses		3,045
	Net operating loss		$(525)

Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above 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. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used.

Required:

How much is the financial advantage (disadvantage) if this tour is discontinued?

The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating some of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Why?

Answer 1

1)
Contribution margin lost if the tour is discontinued		-2,520
Avoidable Fixed Expenses
Fee, tour guide	$      825.00
Room and meals, bus driver and tour guide	$        75.00
Tour Promotion	$      620.00
Fuel for bus	$      100.00
Overnight parking fee, bus	$        50.00	1670
Financial advantage (disadvantage).		-850
2)
The goal of increasing the seat occupancy could be obtained by eliminating tours with a lower-than-average seat occupancy. By eliminating these tours and keeping the tours with a higher-than- average seat occupancy, the overall average seat occupancy for the company as a whole would be improved .This could reduce profits in at least two ways. First, the tours that are eliminated could have contribution margins that exceed their avoidable cost , eliminating these tours would reduce the company’s total contribution margin more than it would reduce total costs, and profits would decline Second, these tours might be attractive  in that they may be drawing tourists to other, more profitable tours being offered by the company..