The average cruise has 100 passengers on board. Each passenger pays $90 for a day's cruising. The riverboat cruises 120 days each year in meeting current demand. There are 14 crew who are each paid an average of $120 per 

cruise. The crew is paid only when the boat sails. Other variable costs are for refreshments, which average $20 per passenger per cruise, and fuel which averages $350 per cruise. Total annual fixed costs are $350,000.

 

(a)Calculate revenue and variable costs for each cruise.

(b)Calculate the number of cruises needed annually to break even.

(c)Using the contribution margin approach calculate the number of cruises needed to annually earn $600,000 profit over breakeven. Discuss whether this profit goal is realistic under current conditions and possible assumptions 

and limitations of the "cost / volume / profit model" at such higher volume levels.

 

(d)Event Boating is considering replacing the existing one-day cruises as detailed above with a one-day luxury cruise costing more at $170 per passenger. Under this new proposal it is estimated that demand will increase, requiring the boat to cruise for 160 days each year with each cruise taking 50 passengers. Costs to change from the original offer include refreshments, up from $15 to $25 per passenger, and annual fixed costs to increase from $350,000 to $430,000. All other variable costs remain the same per passenger as per the standard cruise offer.

(i)Calculate the number of cruises needed annually to break even.

(ii)Given Event Boating wants to maximize total yearly profit discuss, justifying your answer, whether they should continue with the existing standard cruise or replace it with the luxury cruise. Comment on the level of risk of each 

proposal and the possibility of making a loss.(Please note the boat has the same useful life / residual value under either the regular or luxury offer. The boat remains docked at the harbor when not in use having no alternate use.) Show all workings/ calculations as part of your answer.

 

(e)Explain to Event Boating's management how they would be able to integrate cost-volume-profit analysis into their broader planning.As part of your answer, discuss three ways to increase profit and explain how cost volume 

profit analysis is useful in evaluating the different alternatives considered.

Answer rating: 100% (QA)

a Revenue and variable costs for each cruise Revenue per cruise 100 passengers 90 per passenger 9000 Variable costs per cruise Refreshments 100 passengers 20 per passenger 2000 Fuel 350 Crew wages 14 ... View the full answer