Question
In: Accounting
Relevant Revenues and Costs Scenario(11) Brad Winston is the owner and operator of Fishing Unlimited, a...
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?
Solutions
Expert Solution
| 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 answered 1 year agoRelated SolutionsUnderstand 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
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Differential Revenues
___________________________________________________________
Understand the concept of Cost Hierarchy and Cost Avoidance.
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
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