Mechum River Anglers, a division of Old Dominion Travel, offers two types of guided fishing tours, Basic and Deluxe. Operating income for each tour type in 2020 is as follows:

The equipment has a disposal value of zero. Guide wages, supplies, and vehicle fuel are variable costs with respect to the number of tours. Administrative salaries are fixed costs with respect to the number of tours. Brad Barrett, Mechum River Anglers’ president, is concerned about the losses incurred on the deluxe tours. He is considering dropping the deluxe tour and offering only the basic tour.

Required

1. If the deluxe tours are discontinued, one administrative position could be eliminated, saving the company $50,000. Assuming no change in the sales of basic tours, what effect would dropping the deluxe tour have on the company’s operating income?
2. Refer back to the original data. If Mechum River Anglers drops the deluxe tours, Barrett estimates that sales of basic tours would increase by 50%. He believes that he could still eliminate the $50,000 administrative position. Equipment currently used for the deluxe tours would be used by the additional basic tours. Should Barrett drop the deluxe tour? Explain.
3. What additional factors should Barrett consider before dropping the deluxe tours?

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Revenues (500 × $900; 400 × $1,650) Operating costs Administrative salaries Guide wages Supplies Depreciation of equipment Vehicle fuel Allocated corporate overhead Total operating costs Operating income (loss) Basic $450,000 120,000 130,000 50,000 25,000 30,000 45,000 400,000 $ 50,000 Deluxe $660,000 100,000 380,000 100,000 60,000 24,000 66,000 730,000 $(70,000)