Applications of Differential Analysis (L041, 2, 3)

Trails Expeditions offers guided back-country hiking/camping trips in British Columbia. Trails provides a guide and all necessary food and equipment at a fee of $50 per person per day. Trails currently provides an average of 600 guide-days per month in June, July, August, and September. Based on available equipment and staff, maximum capacity is 800 guide-days per month. Monthly variable and fixed operating costs (valued in Canadian dollars) are as follows:

Variable Costs per Guide-Day Fixed Costs per Month RO OCI Ner rE cog ocr 4 Si One EGuUIoMment rental i= $ 5,000 Guide salary............ as) No \aMliniEUllOlA) ago concn cece 5,000 SujcleElS M yee 2% -AdVentising scmicisete ewe 2,000 Insurance ............4: PS. Total) ko eh ee $12,000 SOC Ge see fheas) vers rsx $40 Required Determine the effect of each of the following situations on monthly profits. Each situation is to be evaluated independently of all others.

a. AS$12 increase in the daily fee should result in a 150-unit decrease in monthly sales.

b. A$7 decrease in the daily fee should result in a 300-unit increase in monthly sales. However, because of capacity constraints, the last 100 guide-days would be provided by subcontracting to another firm at a cost of $46 per guide-day.

c. A French tour agency has proposed to place a special, one-time order for 75 guide-days at a reduced fee of $45 per guide-day. The agency would pay all insurance costs. There would be additional fixed administrative costs of $200.

d. An Italian tour agency has proposed to place a special, one-time order for 300 guide-days next month at a special fee of $40 per guide-day. The agency would pay all insurance costs. There would be additional fixed administrative costs of $200. Assume additional capacity beyond 800 guide-days is not available.

e. An Alberta outdoor supply company has offered to supply all necessary food and camping equipment at $7.50 per guide-day. This eliminates the current food costs and reduces the monthly equipment rental costs to $1,800.

f. Clients currently must carry a backpack and assist in camp activities such as cooking. Trails is considering the addition of mules to carry all food and equipment and the hiring of college students to perform camp activities such as cooking. This will increase variable costs by $12 per guide-day and fixed costs by $1,000 per month. However, 600 full-service guide-days per month could now be sold at $75 each.