Question

A study has indicated that some of the bus tours operated by Clear Water Tours Inc. are not
profitable. As a result, consideration is being given to dropping these unprofitable tours to
improve the company’s overall operating performance.
One such tour is a three-day Majestic Islands bus tour. Additional information and an income statement from a typical Majestic Islands tour are given below:
The following additional information is available about the tour:
a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
b. The “Bus maintenance and preparation” cost in the statement 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.
c. Depreciation of buses is due to obsolescence.
d. Liability insurance premiums are based on the number of buses in the company’s fleet.
e. Dropping the Majestic Islands bus tour would not allow Clear Water Tours to reduce the
number of buses in its fleet, the number of bus drivers on the payroll, or the size of the
maintenance and preparation staff.
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
Clear Water’s tours are being filled, compared to an industry average of 60%. The tour
director has explained that Clear Water’s average seat occupancy could be improved con-
siderably by eliminating about 10% of its tours, but that doing so would reduce profits.
Explain how this could happen.


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  • CreatedJuly 08, 2015
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