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Can you walk me thru the solution for this problem? …P3-33. Thanks in advance!
Cost Accounting, Student Value Edition Plus MyAccountingLab with Pearson eText — Access Card Package (15th Edition)
Lifetime Escapes generates average revenue of $7,500 per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows:
Airfair………………………..$1,600
Hotel ………………………..$3,100
Meals………………………..600
Transportation…………….300
Park tickets/other costs…700
Total………………………….$6,300
Annual fixed costs total $570,000.
1] Calculate the number of package tours that must be sold to break even.
2]Calculate the revenue needed to earn a target operating income of $102,000.
3] If fixed costs increase by $19,000, what decrease in variable cost er person must be achieved to maintain the breakeven point calculated in A.
4]The general manager of Lifetime Escapes proposes to increase the price of the package tour to $8,200 to decrease the breakeven point in units. Using information in the origional problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?
Expert Answer
1. Contribution margin per unit = Unit Revenue – Unit Variable Costs = $ 7,500 – $ 6,300 = $ 1,200
Number of package tours that must be sold to break even = Annual Fixed Costs / Contribution Margin per Unit = $ 570,000 / $ 1,200 = 475 package tours.
2. Contribution margin ratio = Contribution margin / Revenue * 100 = $ 1,200 / $ 7,500 * 100 = 16%
Revenue needed to earn target operating income of $ 102,000 = ( Fixed Cost + Target Operating Income) / Contribution Margin Ratio = $ ( 570,000 + 102,000) / 16% = $ 4,200,000
3. If fixed costs increased by $ 19,000, revised fixed cost = $ 589,000
Unit contribution margin = $ 589,000 / 475 = $ 1,240
Hence, variable costs would need to decrease by $ 40. per person.
In other words, the new variable costs would need to be $ 6,300 – $ 40 = $ 6,260 per person.
4. New contribution margin per package tour = $ 8,200 – $ 6,300 = $ 1,900.
New breakeven point in units = $ 570,000 / $ 1,900 = 300 package tours.
The factors that the general manager should consider:
a. Whether it would be possible to earn the same operating income at the new price per package, as the company was earning with unit price of $ 7,500.
b. Would there be many takers at $ 8,200 per package tour.
a. Price being charged by competitors offering similar products.
b. Losing customers and market share.
