Question

Wildlife Escapes generates average revenue of $6,250 per person on its​ 5-day package tours to wildlife parks in Kenya. The variable costs per person are as​ follows:

Airfare

$1,100

Hotel accommodations

1,950

Meals

900

Ground transportation

600

Park tickets and other costs

700

Total

$5,250

Annual fixed costs total $590,000.

1.	Calculate the number of package tours that must be sold to break even.
2.	Calculate the revenue needed to earn a target operating income of $92,000.
3.	If fixed costs increase by $29,500​, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement​ 1?
4.	The general manager at Wildlife Escapes proposes to increase the price of the package tour to $7,750 to decrease the breakeven point in units. Using information in the original​problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package​ tour?

Answer 1

(1) - Number of package tours that must be sold to break even.

Break Even (Packages) = Total Fixed Costs / Contribution margin per package

Contribution margin per package = Revenue per package – Variable costs per package

= $6,250 + 5,250

= $1,000 per package

Contribution Margin Ratio = [$1,000 / 6,250] x 100 = 16%

Break Even (Packages) = Total Fixed Costs / Contribution margin per package

= $590,000 / $1,000

= 590 Tour Packages

(2) - Revenue needed to earn a target operating income of $92,000

Required Revenue to earn income of $92,000 = [Fixed costs + Desired Income] / Contribution Ratio

= [$590,000 + 92,000] / 0.16

= $682,000 / 0.16

= $42,62,500

(3) – Decrease in the Variable cost per person

If the fixed costs increased by $29,500, then the variable costs need to be reduced by $29,500 in order to maintain the break-even tour packages of 590 packages

Therefore, the required decrease in the variable costs per person is calculated as follows

The required decrease in the variable costs per person = Reduction in variable costs / Break even packages

= $29,500 / 590 packages

= $50 per person

(4) – New Break Even points in units

New Contribution per unit = New Revenue per person – Variable costs per person

= $7,750 - 5,250 per person

= $2,500 per person

Therefore, The New Break Even points in units = Total Fixed cost / New contribution per person

= $590,000 / $2,250 per person

= 236 Tour Packages