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 $12 increase in the daily fee should result in a 150-unit decrease in monthly sales.
2. A $7 decrease in the daily fee should result in a 300-unit increase in monthly sales. However, because of capacity constraints, the last 100 guide-days would be provided by subcontracting to another firm at a cost of $46 per guide-day.
3. A tour agency has proposed to place a special, one-time order for 75 guide-days at a reduced fee of $45 per guide-day. The agency would pay all insurance costs. There would be additional fixed administration costs of $200.

Answer 1

Guide days	600
Fees per day	50
Variable cost per day
Food	5
Guide salary	25
Supplies	2
Insurance	8
Total variable costs	40
Contribution margin	10
Guide days per month	600
Total contribution	6000
Fixed costs per month
Equipment rental	5000
Administartion	5000
Advertising	2000
Total fixed costs	12000
Loss	-6000

Option 1
Guide days	450
Fees per day	62
Variable cost per day
Food	5
Guide salary	25
Supplies	2
Insurance	8
Total variable costs	40
Contribution margin	22
Guide days per month	450
Total contribution	9900
Fixed costs per month
Equipment rental	5000
Administartion	5000
Advertising	2000
Total fixed costs	12000
Loss	-2100

Option 2
Guide days	800	100
Fees per day	43	43
Variable cost per day
Food	5
Guide salary	25
Supplies	2
Insurance	8
Total variable costs	40	46
Contribution margin	3	-3
Guide days per month	800	100
Total contribution	2400	-300
	2100
Fixed costs per month
Equipment rental	5000
Administartion	5000
Advertising	2000
Total fixed costs	12000
Loss	-9900

Option 3 (additional offer)
Guide days	75
Fees per day	45
Variable cost per day
Food	5
Guide salary	25
Supplies	2
Insurance	0
Total variable costs	32
Contribution margin	13
Guide days per month	75
Total contribution	975
Fixed costs per month
Equipment rental
Administartion	200
Advertising
Total fixed costs	200
Profit	775

Can be accepted as it has a positive profit margin