You are the owner of a parasailing company that is expanding its operations to a new beachfront location and you need to prepare a 3-year analysis for the bank that can loan you the funds to purchase your boat and parasailing equipment. Many businesses are done by referral, where a business pays a fee to a third party to refer customers to them. However, due to its well-established reputation, it has already received requests to schedule "flights" as soon as the new location opens. Therefore, you expect to break even in the first year, but you must calculate the number of flights required. You should also determine the new breakeven point in year 2 if the location allows referrals, which you think will cost on average about 2% of the total sales price. Finally,

• Sale price per flight $175
• Estimated loan payment per month $350
• Fuel expenses per flight $100
• Full-time programmer salary $2,500 per month
• Boat crew per flight $30
• Dock fee of $500 per month and use of a small office on a dock

Requirements:

• Calculate the breakeven quantity, contribution margin, and contribution margin ratio for Year 1. Explain how the values were determined.
• Calculate the breakeven quantity, breakeven sales, and year 2 contribution margin ratio. Explain how the values were determined.
• Determine the number of flights (units) required to retain a profit of $10,000 in year 3, assuming the company allows referrals.
• Recommend whether the bank should issue the loan.

Answer rating: 100% (QA)

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