564
Chapter ; 12
ll applicable problems are available with McGraw-Hill’s Connect™ Accounting .
PROBLEM 12–18 Dropping or Retaining a Tour [LO2]
Blueline Tours, Inc., operates 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 to improve the company’s overall operating performance.
One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below:
Ticket revenue (100 seat capacity × 40% occupancy ×
$75 ticket price per person) . . . . . . . . . . . . . . . . . . . . . . . . $3,000 100%
Variable expenses ($22.50 per person) . . . . . . . . . . . . . . . . . 900 30
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 70%
Tour expenses:
Tour promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600
Salary of bus driver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Fee, tour guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700
Fuel for bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Depreciation of bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Liability insurance, bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Overnight parking fee, bus . . . . . . . . . . . . . . . . . . . . . . . . . 50
Room and meals, bus driver and tour guide . . . . . . . . . . . 175
Bus maintenance and preparation . . . . . . . . . . . . . . . . . . . 300
Total tour expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950
Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (850)
. The following additional information is available about the tour:
Required:
1. Prepare an analysis showing what the impact will be on the company’s profits if this tour is discontinued.
2. The company’s tour director has been criticized because only about 50% of the seats on Blueline’s tours are being filled as compared to an industry average of 60%. The tour director has explained that Blueline’s average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.