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problem: Lakeshore Tours Company operates a large number of tours throughout the U.S. A study has indicated that some of the tours are not beneficial, & consideration is being given to dropping these tours in order to improve the firm's overall operating performance. One such tour is a two (2) day Battlefield of the French & 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%

Less variable expenses ($24 per person)

1,080

30%

Contribution margin

2,520

70%

Less 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 firm's fleet or the number of bus drivers on the firm'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 firm'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 firm's fleet and not upon how much they are used.

Required:

[A] Make an analysis showing what the impact will be on firm profits if this tour is discontinued.

[B] The firm's tour director has been criticized because only about 50% of the seats on the firm's tours are being filled as compared to an average of 60% for the industry. The tour director has describeed that the firm'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? describe your answer.

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M922184

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