Classic Limo, Inc. provides limousine service to Tri-Cities airport. The price of the service is fixed at a flat rate for each trip and most costs of providing the service are stable for each trip. Marc Pence, the owner, budgets income by estimating two factors that fluctuate with the economy: the fuel cost associated with each trip and the number of customers who will take trips. Looking at next year, Marc develops the following estimates of contribution margin (price less variable cost of the trip, including fuel) and for the estimated number of customers. Although Marc understands that it is not strictly true, he assumes that the cost of fuel and the number of customers are independent.

In addition to the costs of a ride, Marc estimates that other service costs are $50,000 plus $5 for each customer (ride) in excess of 6,000 rides. Annual administrative and marketing costs are estimated to be $25,000 plus 10% of the contribution margin.

1) If you were manager of Classic Limo, Inc. and had to choose only one budget scenario to use for planning for the year, which one of the nine scenarios would you choose? This should be based on the scenario that is most likely. Be sure not to just go with the one you or the company would prefer.

2) Write a two-page paper detailing the thought process used to make the final budgeting decision. The paper must include what assumptions were made (i.e. location of airport, economic conditions) and the full rationale behind your decision. While you have to freedom to make certain assumptions to support your selection, you must use at least two outside sources with factual information to support your decision as well (i.e. fuel prices, weather conditions, tourism statistics). There is not one right answer. You should also think about how areas outside of accounting, like marketing and economics, might affect your decision.

Scenario Number of Customers Excellent Fair Poor Contribution Margin Per Ride (Price - Variable cost) $40 $25 $15 10,500 6,000 4,500