Question

Matt Simpson owns and operates Quality Craft Rentals, which offers canoe rentals and shuttle service on the Nantahala River. Customers can rent canoes at one station, enter the river there, and exit at one of two designated locations to catch a shuttle that returns them to their vehicles at the station they entered. Following are the costs involved in providing this service each year:

	Fixed Costs			Variable Costs
Canoe maintenance	$	2,750		$	7.00
Licenses and permits		3,450			0
Vehicle leases		5,850			0
Station lease		7,370			0
Advertising		6,450			5.00
Operating costs		21,450			5.00

Quality Craft Rentals began business with a $29,500 expenditure for a fleet of 30 canoes. These are expected to last 10 more years, at which time a new fleet must be purchased. Rentals have been stable at about 7,300 per year.

Required:

Matt is happy with the steady rental average of 7,300 per year. For this number of rentals, what price should he charge per rental for the business to make an annual 11% before-tax return on assets using life-cycle costs? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Price per rental? __________

Answer 1

Answer:

Given data,

Fixed costs:

Canoe maintenance = $ 2,750

Licenses and permits = $3,450

Vehicle leases = $5,850

Station lease = $7,370

Advertising = $6,450

Operating cost = $21,450

Total fixed cost = $47,320 (2,750 + 3,450 + 5,850 + 7,370 + 6,450 + 21,450)

Variable costs

Canoe maintenance = $7 * 7,300 rentals

= $51,000

Advertising = $5 * 7,300 rentals

= $36,500

Operating cost = $5 * 7,300 rentals

= $36,500

Total variable cost = $124,000 (51,000 +36,500 +36,500)

Total cost = $171,320 ($47,320+ $124,000)

Required annual return is 11%

Required return is computed on initial investment on $29,500 that comes out to be $3,245 (0.11 * 29,500)

Expected revenue = Total cost + Return

= $171,320 + 3,245

= $174,565

Rentals per year = 7,300

He expects to continue this rental for 10 years

So, price per rental = Expected revenue / Rentals per year

= 174,565 / 7,300

= $23.913

Therefore, he needs to charge $23.91 per rental in order to cover cost and make an annual return of 11%.

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