Moor-n-More operates a boat mooring service in the downtown harbor with 80 docking spaces. The business is open 3,000 hours per year. The mooring charge per boat is $5 per hour; the average boater docks for two hours. Moor-n-More rents the harbor space from the Harbor Authority for $5,000 per month. The general manager is paid $32,940 per year. Three employees assist in the operations and are paid $250 per week for 50 weeks, plus $500 each for a two-week vacation period. Employees rotate their vacations. Other costs include fixed city taxes of $1,500 per month and variable costs of 10 cents per occupied mooring-space hour (a usage tax charged by the Harbor Authority).
a. Draw a cost-volume-profit graph for Moor-n-More on an annual basis. Use thousands of mooring-space hours as the measure of volume of activity. [Moor-n-More has an annual capacity of 240,000 mooring-space hours (80 spaces? 3,000 hours per year).]
b. What is the contribution margin ratio? What is the annual break-even point in dollars of mooring revenue?
c. Suppose that the three employees were taken off the hourly wage basis and paid 40 cents per boat moored, with the same vacation pay as before. (1) How would this change the contribution margin ratio and total fixed costs? (2) What annual revenue would be necessary to produce operating income of $112,560 under these circumstances?