Question

Adventure Expeditions offers guided back-country hiking tours. Adventure Expeditions provides a guide and all necessary food and equipment at a fee of $50 per person per day. Adventure Expeditions currently provides an average of 600 guide-days per month in June, July, August, and September. Based on available equipment and staff, maximum capacity is 800 guide-days per month. Monthly variable and fixed operating costs.

Variable costs per guide-day		Fixed costs per month
Food	$ 5	Equipment rental	$5,000
Guide Salary	25	Administration	5,000
Supplies	2	Advertising	2,000
Insurance	8
Total	$40	Total	$12,000

Determine the effect of each of the following situations on monthly profits. Each situation is to be evaluated independently of all others.

1. A different tour agency has proposed to place a special, one-time order for 300 guide-days next month at a special fee of $40 per guide-day. The agency would pay all insurance costs. There would be additional fixed administrative costs of $200. Assume additional capacity beyond 800 guide-days is not available.
2. An outdoor supply company has offered to supply all necessary food and rafting equipment at $7.50 per guide-day. This eliminates the current food costs and reduces the monthly equipment rental costs to $1,800.
3. Clients currently must carry a backpack and assist in camp activities such as cooking. Adventure Expeditions is considering the addition of college students to carry all food and equipment and perform activities. This will increase variable costs by $12 per guide-day and fixed costs by $1,000 per month. However, 600 full-service guide-days per month could now be sold at $75 each.

Answer 1

Current

selling price = 50 per person per day

guide days = 600

revenue = selling price x guide days = 600 x 50 = 30000

variable cost = per unit variable cost x guide days = 40 x 600 = 24000

fixed costs = 12000

operating profit = revenue - variable - fixed cost = 30000 - 24000 - 12000 = 6000 (loss)

Scenario 1

sales will be divided between normal (500 hours) and 300 agency to maximise capacity of 800 hours.

normal 500 hour sales

sales = 500 x 50 = 25000

variable cost = 500 x 40 = 20000

from tour agency

sales= 300 x 40 = 12000

variable cost = 300 x (40 - 8) = 9600

fixed costs = 12000 + 200 = 12200

operating profit = 25000 + 12000 - 20000 - 9600 - 12200 = 4800 (loss)

Scenario 2

sales = 600 x 75 = 45000

variable cost per guide day = 40 - 5 ( food) + 12 ( new addition of college student) + 7.5 ( outdoor company) = 54.5

total variable = 54.5 x 600 = 32700

fixed cost = 1200 ( new equipment cost ) +5000 + 2000 + 1000 ( new fixed costs) = 9200

operating profit = 45000 - 32700 - 9200 = 3100 profit