Lisa is considering adding ferry services between June Island and Starfish Island. Lisa can rent ferries on a monthly basis at $3,200 per ferry, per month. Each ferry can accomodate 75 passengers, and can make 8 one-way trips a day, 30 days a month. Lisa decides to charge $6 per one-way ride.

Lisa has the following costs:

Ticket processing: $.50 per passenger

Taxes: $.80 per passenger

Fuel: $105.00 per one-way trip

Crew Salaries: $60.00 per one-way trip

Ferry Cleaning: $25.00 per one-way trip

Shore costs vary with the number of ferries in the following manner:

Number of Ferries	Total Shore Costs
1	$12,000 per month
2	$13,000 per month
3	$14,000 per month
4	$15,000 per month

Lisa knows that the demand is uncertain, but that demand and frequency are connected. The expected demand given different frequencies of service is as follows:

Number of One-Way Trips Per Day	Passengers Expected per One-Way Trip
1-6 one way trips	80 passengers
7-12 one way trips	86 passengers
13-16 one way trips	93 Passengers
17-20 one way trips	108 Passengers
21-24 one way trips	112 Passengers

Questions:

1) What is the firm's complete cost structure? Identify the fixed costs, variable costs, and step costs in this problem as well as the activities that drive Lisa's costs.

2) Calculate the contribution margin per passenger. Calculate the contribution margins per one-way trip for each of the frequencies in Table I.

3) Imagine that Lisa has rented 1 ferry per month. How many one-way trips should she operate? Repeat this for 2 ferries, 3 ferries, and 4 ferries.

4) How many ferries should Lisa rent?

5) Using break even analysis, provide Lisa with insights into how the risk with 2 ferries compares to the risk of 3 ferries.

Answer rating: 100% (QA)

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