Question: Suppose a tour agent approached the general manager of the

Suppose a tour agent approached the general manager of the Grand Canyon Railway with a proposal to offer a special guided tour to the agent’s clients. The tour would occur 20 times each summer and be part of a larger itinerary that the agent is putting together. The agent presented two options:
(a) A special 65-mile tour with the agent’s 30 clients as the only passengers on the train, or
(b) Adding a car to an existing train to accommodate the 30 clients on an already scheduled 65-mile tour.
Under either option, Grand Canyon would hire a tour guide for $200 for the trip. Grand Canyon has extra cars in its switching yard, and it would cost $40 to move a car to the main track and hook it up. The extra fuel cost to pull one extra car is $.20 per mile. To run an engine and a passenger car on the trip would cost $2.20 per mile, and an engineer would be paid $400 for the trip.
Depreciation on passenger cars is $5,000 per year, and depreciation on engines is $20,000 per year. Each passenger car and each engine travels about 50,000 miles a year. They are replaced every 8 years.
The agent offered to pay $32 per passenger for the special tour and $15 per passenger for simply adding an extra car.
1. Which of the two options is more profitable to Grand Canyon? Comment on which costs are irrelevant to this decision.
2. Should Grand Canyon accept the proposal for the option you found best in number 1? Comment on what costs are relevant for this decision but not for the decision in number 1.

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  • CreatedNovember 19, 2014
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