"Cadillac" Cody operates a shuttle-bus service between the Miami, Florida International Airport and the Florida Keys. A popular vacation getaway, the Florida Keys are a string of islands located off the southern tip of Florida. The Keys offer year-round warm weather, white sandy beaches, and sunny skies. Vacationers can spend the day in a variety of water sports such as surfing, snorkeling, sailing, and scuba diving. Numerous charter boats also offer wouldbe anglers the opportunity to experience deep-sea fishing and snare game fish such as marlin, mahi-mahi, swordfish, and snapper.

Partly out of a desire to keep the Keys pristine, Miami is the closest large airport. The Miami International Airport is roughly 80 miles away from Key Largo, one of the nearest islands, and a bit less than 200 miles away from Key West, the southernmost island.

Most individuals and families visiting the Keys rent a car at the Miami airport and drive to their final destination. Most large groups (e.g., church groups, corporate outings, senior groups), however, prefer to take a shuttle bus due to the substantial cost savings and because they generally do not need transportation after reaching their final destination (i.e., their activities are preplanned and include transportation). Cody's business is aimed at these groups; for a fixed fee Cody will meet a group at the airport and transport them to their hotel, campsite, or charter boat. Cody is, of course, delighted to offer return transportation as well.

Cody owns a mini-bus that can seat up to 24 people. His air-conditioned bus comes with many conveniences like two video monitors and DVD players. Having lived in the area his entire life, Cody also has a wealth of information about area attractions, local celebrities, surfing, and fishing. All in all, both Cody and his customers have a blast.

Cody has built a sterling reputation and has a core group of loyal clients that use his services exclusively whenever they visit the Keys. This core group also serves a valuable role in directing other groups toward Cadillac Cody.

Cody offers two primary products: A one-way trip between Miami and Key Largo (the Upper Keys), and a one-way trip between Miami and Key West (the Lower Keys). Under Cody's straightforward pricing scheme, groups are charged $300 for a one-way trip to the Upper Keys and $500 for a one-way trip to the Lower Keys. (Cody does not offer any discounts for booking round-trip travel. Also, the price is the same regardless of the direction of travel.) This fee entitles a group to exclusive use of Cody's mini-bus (i.e., Cody only transports one group at a time). Gratuities also are a part of Cody's business, and, without exception, clients give Cody a 15% tip (as suggested in the brochure). Rightfully, Cody views gratuities as personal income rather than business income.

A one-way trip to the Upper Keys takes about two hours of Cody's time (this includes 80 miles of driving plus time for passenger loading and drop offs). As a result, Cody believes that at best he can squeeze in two round-trips (four one-way trips) to the Upper Keys in a day. A one-way trip to the Lower Keys takes about 3 hours and 45 minutes of Cody's time (this includes 200 miles of driving plus time for passenger loading and drop-offs), and, as a result, Cody believes that only one round trip (two one-way trips) to the Lower Keys per day is feasible.

Cody's work schedule is somewhat erratic. During the peak tourist season, which lasts roughly from October 1 through March 31 (6 months), it is common for Cody to go two or three weeks without a break. Off-peak, however, it is equally common for Cody to work a three-day week. Analysis of Cody's travel log from the prior year showed that Cody made 400 paid one-way trips to the Upper Keys and 200 paid one-way trips to the Lower Keys (sometimes, Cody will only have a paid trip on the drive to or from the Keys; one-way trips where the bus is empty are called "deadhead" trips). Of these 400 and 200 one-way trips, 275 and 140, respectively, were during the peak season. Moreover, of the 100,000 miles Cody drove last year (this number includes trip mileage and business related errands), Cody estimates that 62,500 miles were driven during the peak season and 37,500 miles were driven during the off-peak season.

The following table details Cadillac Cody's business income statement for the most recent year:

In addition to his business income, Cody earned $220,000 × 0.15 = $33,000 in tips last year. Thus, Cody's overall (business plus personal) income in the most recent year was $55,000 + $33,000 = $88,000.

Required:

a. Two groups recently contacted Cody about employing his services. Unfortunately, both groups will be arriving at the Miami airport this coming Tuesday, and one group wants to book a one-way trip to the Upper Keys while the other group wants to book a one-way trip to the Lower Keys. Cody already has scheduled a trip to the Upper Keys for the morning, so he will only be able to take one of the two groups. (Note: if he takes the group wishing to go to the Lower Keys, this will make for a long day.) On this particular Tuesday Cody will not be able to book a group for either return trip (i.e., his bus will be empty on the drive back). Which group should Cody book, and by how much will Cody's overall (business + personal) income increase by booking this group?

b. Assume that if Cody books the group traveling to the Upper Keys, then he will be able to book another group for the return trip to the Miami airport. Unfortunately, Cody will not be able to book another group for the return trip if he goes to the Lower Keys. How does this piece of information affect your answer to part (a)? In other words, which group should Cody book, and by how much will his overall (business + personal) income increase by booking this group?

c. Cody and his wife are planning an upcoming vacation (their first vacation in years).

They would like to take a week (7 days) off and are considering taking their vacation in either the first week in March (during Cody's peak business season) or during the second week in July (during Cody's off-peak business season). How much business and personal income would Cody expect to sacrifice if he and his wife schedule their trip for March? How much business and personal income would Cody expect to sacrifice if he and his wife schedule their trip for July? (Hint: Prepare a contribution margin statement segmented by trips made during the peak season and trips made during the off-peak season; consider both business and tip income).

d. One of Cody's friends mentions to him that hotels and airlines seem to offer discounts during their off-peak seasons (to spur additional demand). This friend suggests that Cody follow a similar strategy. Since most of Cody's costs are fixed, the friend believes that Cody could clean up with such a strategy. Specifically, Cody's friend believes that Cody would increase his off-peak volume by 60% if he cut his fares by 25% during the off-peak season. By how much would Cody's overall income increase if the friend's numbers are accurate (assume Cody's mileage during the offpeak season will increase by 40%, and not 60%, because he will have fewer deadhead trips). Next, evaluate the friend's advice-in particular, why might such a strategy work well for higher-priced items like airfare and hotels but not work as well for lower-priced items like a shuttle bus?

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Amount $220,000 ($60,000) ($45,000) ($30,000) en Revenue Cost of bus (net of salvage value)2 Office operating expenses Fuel & oil costs Bus-related insurance & maintenance cost ($25,000) Brochures & advertising costs Business income ($5,000) $55,000 $220,000 (400 one-way trips to the Upper Keys X $300) + (200 one-way trips to the Lower Keys X $500) Cody purchases a new bus each year. A new bus, with a of the amenities Cody desires, costs approximately $85,000. At the end ofthe year, Cody sells the bus for approximately $25,000 Cody has a smll office at the airport and a part-time administrative assistant to help with run ning the business (e.g.. to help with scheduling and paperwork,) Cody spends approximately $0.30 in gas and oil per mile: $30,000 -(62,50037,500) x $0.30 Insurance costs are fixed, but maintenance costs vary with miles driven. Cody estimates that maintenance costs anount to $0.15 per mile: $25,000-$10,000 + (62,500 + 37,500) Cody has a local advertising company put together a nice color brochure each year $0.15.