Question

Relevant Revenues and Costs

Scenario(11)

Brad Winston is the owner and operator of Fishing Unlimited, a charter fishing business operated out of Oregon Inlet, NC. Brad has been taking groups of guests offshore to fish for tuna and marlin for over 15 years. He purchased his current fishing boat when he started the business, but now believes that a larger and better outfitted vessel would allow him to increase the rate he charges per charter. Currently he can carry a maximum of 6 guests while the larger boat will carry up to 8. The larger boat would also require him to take 2 deck hands on each outing, providing better service to his customers. Cost data for Brad’s business is shown in the table below.

Fishing Unlimited

Annual straight-line depreciation on boat

$ 8,300

($175,000 original cost – $90,000 estimated resale value/20 years)

Fuel Cost (per hour)

$ 50

Insurance Premium (annual)

$ 1,900

Maintenance and Repairs (annual)

$ 3,500

Fishing Tackle and Gear (original cost)

$ 7,000

Tackle and Bait (per guest)

$ 20

Deck Hand wages (per hour)

$ 20

Dock Fees (annual)

$ 2,400

Captain's License (annual)

$ 200

Food and Beverages (per guest)

$ 25

Professional Fees (per year)

$ 750

Dock Utilities (annual)

$ 1,200

Brad has someone interested in purchasing his existing boat for $80,000. He could use this cash as a deposit on the new boat which will cost him $225,000. His banker estimates the payments on the new boat will be about $1,500. The new boat is more fuel efficient and he believes he can cut his fuel costs by 10% but the more expensive boat will increase his insurance premium by 12%. He is also concerned that he will have to change to a larger boat slip which would increase his dock fees by 5%. The good thing about the new boat is that he should save on maintenance and repairs, at least for the first 3 years. The only other expense Brad would incur with the new boat is adding some additional fishing tackle and gear to accommodate larger parties that he estimates would cost him about $1,500.

His fees for both the old and the new boat are as follows:

Old Boat

New Boat

4 hours

$ 550

$ 600

6 hours

$ 650

$ 700

Full Day (9 hours)

$ 1,100

$ 1,200

Questions

1. Which costs are relevant to Brad’s decision to purchase a new, larger boat?

2. If Brad decides to purchase a larger boat, what costs will be affected by this decision? Will they increase or decrease?

3. Identify any unavoidable costs associated with the operation of Fishing Unlimited.

4. Calculate the revenue generated by a 6-hour trip with the old boat (6 guests) and the new boat (8 guests) and compare the two figures. Identify the costs that changed. What conclusion can you draw based on your analysis?

Answer 1

1. Costs relevant to purchase a new, larger boat
	Costs	Old	New
1	Payments for new boat	0	1500
2	Fuel Cost (per hour)	50	45	(New is fuel efficient, cut cost by 10%)
3	Insurance premium (annual)	1900	2,128	(Increase by 12%)
4	Maintanance and repairs	3500	0	New boat, complete saving for 3 years
5	Fishing Tackle and Gear	7000	1500	In addition
6	Deck hand wage (per hour)	20	40	(2 deck hand workers are required)
7	Dock Fees (annual)	2400	2,520	Increase by 5%
2.If Brad decides to purchase a larger boat, what costs will be affected by this decision? Will they increase or decrease?
	Affected costs	Old	New	Difference	Impact
1	Payments for new boat	$         -	$      1,500	$     1,500	Increase in cost
2	Fuel Cost (per hour)	$        50	$          45	$          -5	Decrease in cost
3	Insurance premium (annual)	$    1,900	$      2,128	$        228	Increase in cost
4	Maintanance and repairs	$    3,500	$           -	$    -3,500	Decrease in cost
5	Fishing Tackle and Gear	$    7,000	$      1,500	$    -5,500	Increase in cost
6	Deck hand wage (per hour)	$        20	$          40	$         20	Increase in cost
7	Dock Fees (annual)	$    2,400	$      2,520	$        120	Increase in cost
3. Unavoidable costs with the operation of Fishing unlimited
1	Fuel cost
2	Annual insurance premium for boat
3	annual Maintenance and Repairs in case of an existing boat
4	Fishing Tackle and Gear
5	Deck hand wages
6	Dock fees
7	Captains licence
8	Professional fees
9	Dock utilities
4. revenue generated by a 6-hour trip with the old boat (6 guests) and the new boat (8 guests)
	6 hour trip with old boat	6 hour trip with new boad
	$ 650	$ 700
	Costs which have changed
1	Payments for new boat	$         -	$      1,500	$     1,500	Increase in cost
2	Fuel Cost (per hour)	$        50	$          45	$          -5	Decrease in cost
3	Insurance premium (annual)	$    1,900	$      2,128	$        228	Increase in cost
4	Maintanance and repairs(annual)	$    3,500	$           -	$    -3,500	Decrease in cost
5	Fishing Tackle and Gear	$         -	$      1,500	$     1,500	Increase in cost
6	Deck hand wage (per hour)	$        20	$          40	$         20	Increase in cost
7	Dock Fees (annual)	$    2,400	$      2,520	$        120	Increase in cost
	Incase of annual costs
1	Payments for new boat	$         -	$      1,500	$     1,500	Increase in cost
2	Insurance premium (annual)	$    1,900	$      2,128	$        228	Increase in cost
3	Maintanance and repairs(annual)	$    3,500	$           -	$    -3,500	Decrease in cost
4	Dock Fees (annual)	$    2,400	$      2,520	$        120	Increase in cost
5	Fishing Tackle and Gear	$         -	$      1,500	$     1,500	Increase in cost
	There has been a net increase in cost by $ 152
	Incase of per hour costs
1	Fuel Cost (per hour)	$        50	$          45	$          -5	Decrease in cost
2	Deck hand wage (per hour)	$        20	$          40	$         20	Increase in cost
	There has been a net increase in cost by $15 per hour
	The increse in cost for 6 hours will by $15 x 6 = $ 90
	As there is a increse in revenue per trip from old to new by $ 50 (700-650)
	And an increse of cost by $ 90 per trip
	Based on the above analysis it is not cost effective to invest in a new boat
	as we wont even be able to recover the variable costs in case of a 6 hour trip	ekkarill92 Next > < Previous Related Solutions Understand the concept of relevant revenues and costs. What makes a revenue or cost relevant? ________________________________________________... Understand the concept of relevant revenues and costs. What makes a revenue or cost relevant? ________________________________________________ ________________________________________________ ________________________________________________ Know and understand the following terms: Avoidable costs _______________________________________________________________ Opportunity costs _____________________________________________________________ Relevant Costs ________________________________________________________________ Differential Costs ______________________________________________________________ Sunk Costs ___________________________________________________________________ Differential Revenues ___________________________________________________________ Understand the concept of Cost Hierarchy and Cost Avoidance. What are the different cost hierarchies and when are they eliminated? ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ Review examples of costs in the above 4 categories that we covered in class... The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will... The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for the shop are $30,000 a year. Depreciation on the repair tools will be $10,000. a. Prepare an income statement for the shop based on these estimates. The tax rate is 20%. Dollars in minus dollars out. Adjusted accounting profits. Add back depreciation tax shield. b. Calculate the operating cash flow for the repair shop using the three methods... The owner of a bicycle repair shop forecasts revenues of $180,000 a year. Variable costs will... The owner of a bicycle repair shop forecasts revenues of $180,000 a year. Variable costs will be $55,000 and rental costs for the shop are $35000 a year. Depreciation on the repair tools will be $15000 a. Prepare an income statement for the shop based on these estimates. The tax rate is 20% b. Calculate the Operating cash flow for the repair shop using three methods given below dollars in minus dollars out adjusted accounting profits add back depreciation tax... The owner of a bicycle repair shop forecasts revenues of $200,000 a year. Variable costs will... The owner of a bicycle repair shop forecasts revenues of $200,000 a year. Variable costs will be $60,000, and rental costs for the shop are $40,000 a year. Depreciation on the repair tools will be $20,000. b. Calculate the operating cash flow for the repair shop using the three methods given below: Now calculate the operating cash flow. Dollars in minus dollars out. Adjusted accounting profits. Add back depreciation tax shield. The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variable costs will... The owner of a bicycle repair shop forecasts revenues of $224,000 a year. Variable costs will be $66,000, and rental costs for the shop are $46,000 a year. Depreciation on the repair tools will be $26,000. Prepare an income statement for the shop based on these estimates. The tax rate is 40%. Calculate operating cash flow for the year by using all three methods: (a) Dollars in minus dollars out; (b) Adjusted accounting profits; and (c) Add back depreciation tax... Question 1 [CLO-2] Explain how a manager should determine which revenues and costs are relevant in... Question 1 [CLO-2] Explain how a manager should determine which revenues and costs are relevant in decision making. Give two examples. Essay (no model answer given) 5 points Question 2 [CLO-2] What are the differences between fixed and variable costs? Explain, and give an example of each. Essay (no model answer given) 5 points Question 3 [CLO-2] ‘Fixed overhead costs per unit can never be useful for budgeting.’ Do you agree with this opinion? Give reasons for your answer. Essay... Mastery Problem: Decision Making using Differential Analysis Decision making involves quantifying relevant revenues and costs with... Mastery Problem: Decision Making using Differential Analysis Decision making involves quantifying relevant revenues and costs with the goal of maximizing net cash flows. In many situations it is difficult to quantify all the important elements of a decision. Fixed costs are generally in the short-term because they are often unavoidable. Costs that have been incurred in the past and cannot be recouped are not relevant. These costs are called . Revenue given up by not choosing an alternative is relevant.... Explain why different costs and revenues may be relevant when making short-term product mix decisions compared... Explain why different costs and revenues may be relevant when making short-term product mix decisions compared with making long-term product mix decisions? ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions Imagine you're a business owner: If waiting in lines is a truly inescapble event for your... A piston-cylinder device initially contains 0.20(kg) of steam at 3.5(MPa), 300(C). The steam loses heat to... 1.The TCA cycle in a particular tissue has been inhibited by fluoroacetate. However, it is not... 1.Sweet Company’s outstanding stock consists of 2,000 shares of cumulative 4% preferred stock with a $100... Apply human rights, legal rights and moral rights to the Tennessee v. Garner case, discussing the... Do you have a wireless network at home? What kind of wireless equipment do you have?... 1) A gas mixture containing 75% air, 20% of A and 5% of B (by volume)... ADVERTISEMENT About @ 2020 WizEdu