Question

n this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s question with a recommendation.

You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to prepare a three-year analysis for the bank that may loan you the funds to purchase your boat and parasailing equipment. 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 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 the 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.

Answer 1

Year 1

Year 2

Year 3

Year 1 Sale price 175 - variable costs fuel costs 100 boat crew 30 (130) = contribution 45 per unit Fixed costs = loan payment + scheduler salary + dock fee = 4,200 + 30,000 + 6,000 = $40,200 Break-even quantity (units) = Fixed costs / Contribution per unit = 40,200 / 45 = 893 flights approx. Contribution margin ratio = Contribution/Sale price *100 = 45/175 * 100 = 25.71%

Year 2 Sale price 175 - variable costs fuel costs Referrals 100 3.5 (2% of 175) boat crew 30 (133.5) = contribution 41.5 per unit Fixed costs = loan payment + scheduler salary + dock fee = 4,200 + 30,000 + 6,000 = $40,200 Break-even quantity (units) = Fixed costs / Contribution per unit = 40,200 / 41.5 = 969 flights approx.

Contribution margin ratio = 41.5 / 175 * 100 = 23.71$

Year 3 Contribution per unit = $41.5 Flights Required = (Fixed costs + desired profit) / Contribution per unit = (40,200 + 10,000) / 41.5 = 1210 flights approx.