Dropping or Retaining a Tour [LO2]

Blueline Tours, Inc., operates 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 to improve the c ompany’s o verall ope rating pe rformance.

One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below:

Ticket revenue (100 seat capacity × 40% occupancy ×
$75 ticket price per person) . . . . . . . . . . . . . . . . . . . . . . . . $3,000 100%
Variable expenses ($22.50 per person) . . . . . . . . . . . . . . . . . 900 30 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100 70%
Tour expenses:
Tour promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600 Salary of bus driver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Fee, tour guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700 Fuel for bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Depreciation of bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450 Liability insurance, bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Overnight parking fee, bus . . . . . . . . . . . . . . . . . . . . . . . . . 50 Room and meals, bus driver and tour guide . . . . . . . . . . . 175 Bus maintenance and preparation . . . . . . . . . . . . . . . . . . . 300 Total tour expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,950 Net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (850)

The following additional information is available about the tour:

a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.

b. The “Bus maintenance and preparation” cost on the previous page 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.

c. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.

d. Liability insurance premiums are based on the number of buses in the company’s fleet.

e. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance a nd pr eparation s taff.
Required:
1. Prepare an analysis showing what the impact will be on the company’s profits if this tour is discontinued.
2. The company’s tour director has been criticized because only about 50% of the seats on Blueline’s tours are being filled as compared to an industry average of 60%. The tour director has explained that Blueline’s average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.