Question

Lakeshore Tours Inc., operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the French and Indian Wars bus tour. An income statement from one of these tours is given below:

	Ticket revenue (100 seats x 45% occupancy x $80 ticket price)		$3,600	100%
	Variable expenses ($24 per person)		1,080	30%
	Contribution margin		2,520	70%
	Fixed tour expenses:
	Tour promotion	$620
	Salary of bus driver	400
	Fee, tour guide	825
	Fuel for bus	100
	Depreciation of bus	400
	Liability insurance, bus	250
	Overnight parking fee, bus	50
	Room and meals, bus driver and tour guide	75
	Bus maintenance and preparation	325
	Total fixed tour expenses		3,045
	Net operating loss		$(525)

Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used.

Required:

1. Prepare an analysis showing the financial advantage (disadvantage) if this tour is discontinued. Put in a chart format. 5 Points
2. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Respond in a memo format to the tour director. Include your analysis from part a in your memo to support your conclusions. 15 Points – Points will be awarded for format, mechanics and content.

Answer 1

Cost Benefits Analysis
Benefits of discontinued of Tour
Saving Avoidable cost
Tour promotion	$        620
Salary of bus driver (Number of Bus driver remains unchanged. Hence, It is unavoidable cost.)	$            -
Fee, tour guide	$        825
Fuel for bus	$        100
Depreciation of bus (Buses do not wear out through use; rather, they eventually become obsolete. Hence, It is unavoidable cost.)	$            -
Liability insurance, bus (The liability insurance depends upon the number of buses in the company's fleet. Number of Bus driver remains unchanged. Hence, It is unavoidable cost.)	$            -
Overnight parking fee, bus	$           50
Room and meals, bus driver and tour guide	$           75
Bus maintenance and preparation (This is allocation of the salaries of mechanics and other service personnel. Hence, It is unavoidable cost.)	$            -
Total Saving Avoidable cost		$        1,670
Cost of discontinued of Tour
Contribution Margin Lost		$        2,520
Financial advantage (disadvantage) if this tour is discontinued.		$         (850)
Financial disadvantage if this tour is discontinued.		$           850

Discontinued of tours with a lower occupancy rate compared to the industry average would improve the overall average seat occupancy ratio for company as a whole. But what about profit? Discontinued tours could reduce the overall profit of the company. Because of Net profit will be decreased by $ 850 if the tour is eliminated. It is my advice to increase your customer focus. (I mean This bus for Battlefields of the French and Indian Wars bus tour but provided service to other normal people to buy the ticket.)