In: Accounting
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.