Problem IV – 15 Points Squirrely Tours operates a large number of tours throughout the United

| February 14, 2018

Problem IV – 15 Points Squirrely Tours operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company’s overall operating performance. One such tour is a two-day bus tour of peanut farms. An income statement from one of these tours is given below: Ticket revenue (100 seats × 45% occupancy × $80 ticket price) $3,600 100% Less variable expenses ($24 per person) 1,080 30% Contribution margin 2,520 70% Less fixed tour expenses: Tour promotion $620 Salary of bus driver 400 Fee, tour guide 825 Fuel for bus 100 Depreciation of bus 400 Liability insurance, bus 250 Overnight parking fee, bus 50 Room and meals, bus driver and tour guide 75 Bus maintenance and preparation 325 Total fixed tour expenses 3,045 Net operating loss $ (525) Dropping this tour would not affect the number of buses in the company’s fleet or the number of bus drivers on the company’s payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted. The “Bus maintenance and preparation” cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company’s fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company’s fleet and not upon how much they are used. Required: 1. The company’s tour director has been criticized because only about 50% of the seats on the company’s tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company’s average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director’s conclusion? Briefly explain your response. You do not, nor should you, have to make any computations to answer this question. Consider qualitative factors that could ultimately turn into quantitative factors. continued 2. Prepare an analysis showing what the impact will be on company profits if this tour is discontinued. Problem V – 20 Points Fatty’s T-shirt Shop only has three costs: T-shirt cost, rent cost on the shop, and utilities cost. Fatty sells the T-shirt for $14.50 each. Management has prepared the following estimated cost information for next month: At 8,000 At 10,000 T-shirts T-shirts T-shirt cost $48,000 $60,000 Rent cost $3,600 $3,600 Utilities cost $6,800 $8,300 Assume that all of the activity levels mentioned in this problem are within the relevant range. Required: 1. Calculate the cost function, y = a +b(X), for t-shirt, rent, and utility costs. Show your answers in the format “y = a + b(X)”. If any of the variables are “0,” show “0.” T-Shirt: Rent: Utility: continued 2. If Fatty produces 9,000 t-shirts, what will be the total production cost?

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