Royal Rotterdam is a cruise ship company. It currently has six ships and plans to

add two more. It offers luxury passenger cruises in the Caribbean, Alaska, and the

Far East$\mathrm{.}1$

Management is currently addressing what to do with an existing ship, the S$.$S$.$

Maastricht, when she is replaced by a new ship. The S$.$S$.$ Maastricht was built $20$

years ago for $$100$ million. For accounting purposes, she was assumed to have a

$20-$year life, and hence is now fully depreciated. To replace the S$.$S$.$ Maastricht

would cost $$500$ million, but her current market value is $$371,250,000.$

The Royal Rotterdam Line can borrow or lend money at $10$ percent per year. Likewise, it can rent out the S$.$S$.$ Maastricht to a different operator and charge a rent

equivalent to $10$ percent per year of the current market value.

The S$.$S$.$ Maastricht is now sailing the Caribbean and will be replaced next year

by a new ship. The S$.$S$.$ Maastricht might be moved to the Mediterranean for a

new seven$-$day Greek island tour. A seven$-$day cruise would depart Athens Sunday

night, stop at four ports before returning to Athens Sunday morning, and prepare

for a new cruise that afternoon. The S$.$S$.$ Maastricht can carry as many as $1,500$

passengers. The accompanying data summarise the operating cost for this sevenday cruise:

Estimated Operating Cost of Seven$-$Day Greek Island Cruise

$($S$.$S$.$ Maastricht$)$

Variable Cost$*$ Fixed Cost$$

Labour $60,00080,000$

Food $236,00010,500$

Fuel $177,000$

Port fees and services $62,000$

Marketing, advertising, promotion $240,000$

Supplies $28,00038,000$

Totals $324,000607,500$

$*$Based on $1,200$ passengers.

$$Fixed costs per weekly cruise. Assume there are $50$ weeks $($and hence $50$ cruises$)$ in a year