Shea River Tours, a division of Old WorldTravel, offers two types of guided fishing tours: Beginner and Advanced. Operating income for each tour type in

2017 above.

REQUIRED:

1. If the Advanced tours are discontinued, one administrative position could beeliminated, saving the company $104,000. Assuming no change in the sales of Beginner tours, what effect would dropping the Advanced tour have on thecompany's operatingincome?

2. Refer back to the original data. If Shea River Tours drops the Advanced tours, Jones estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $104,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Jones drop the Advanced tour?

3. What additional factors should Jones consider before dropping the Advanced tours?

Difference: Incremental (loss in revenues) and savings in costs from dropping Advanced tours
Lost revenues from Advanced tours	$(1,361,050)
Avoidable operating costs from dropping Advanced tours:
Administrative salaries
Guide wages	762,000
Supplies	220,000
Vehicle fuel	57,000
Total avoidable costs
Gain/(loss) in operating income from dropping Advanced tours	(322050)

On the basis of financial considerations alone, should Shea River Tours discontinue the Advanced tours, assuming one administrative position could be eliminated, saving the company

$104,000? (Enter a positive amount only.) Shea's operating profit will be $ ___________. lower if it discontinues the Advanced tours. Therefore, Shea should not discontinue the Advanced tours.

Requirement 2. Refer back to the original data. If Shea River Tours drops the Advanced tours, Jones estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $104,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Jones drop the Advanced tour?(Enter a zero if the cost is not relevant. If the net effect is an operating loss, enter the amount with parentheses. Enter losses in revenues and increases in costs as negative amounts.)

Should Shea River Tours try to sell more Beginner tours?(Enter a positive amount only.) Shea will generate$_____________ of incremental operating profit and, therefore, should try to sell more Beginner tours.

Requirement 3. What additional factors should Jones consider before dropping the Advanced tours?

Select all of the correct statements.

A. Jones should investigate the possibility of increasing the price of the Advanced tours if customers would tolerate it.

B. Jones should see if it is possible to reduce the costs of Advanced tours before dropping them.

C. Jones should consider if it is possible to decrease the number of Advanced tours sold

D. Jones should consider if it is possible to increase the number of Advanced tours sold.

E. None of the above are correct.
 

Transcribed Image Text:

Operating income for each tour Beginner Advanced Revenues (1,015 x $920; 815 x $1,670) $ 933,800 $ 1,361,050 Operating costs Administrative salaries 237,000 201,000 Guide wages 259,000 762,000 Supplies 110,000 220,000 Depreciation of equipment 53,000 126,000 Vehicle fuel 67,000 57,000 Allocated corporate overhead 95,000 130,000 821,000 1,496,000 Total operating costs 112,800 $ (134,950) Operating income (loss) Operating income for each tour Beginner Advanced Revenues (1,015 x $920; 815 x $1,670) $ 933,800 $ 1,361,050 Operating costs Administrative salaries 237,000 201,000 Guide wages 259,000 762,000 Supplies 110,000 220,000 Depreciation of equipment 53,000 126,000 Vehicle fuel 67,000 57,000 Allocated corporate overhead 95,000 130,000 821,000 1,496,000 Total operating costs 112,800 $ (134,950) Operating income (loss)

Answer rating: 100% (QA)

Solution Requirement 1 Barrett should not drop the deluxe tours as follows Lost revenues from deluxe ... View the full answer