COST-VOLUME-PROFIT ANALYSIS (MANAGERIAL ACCOUNTING CASE)

SUP RIDES (Stand-Up Paddle Boards)

Mathew, Thomas, and Michael Hahn are three brothers, all University students, who own SUP rides, a small business that rents stand-up paddle (SUP) boards on the shores of Lake Huron in Southern Ontario. Stand-up paddling is one of the fastest-growing water sports in the world. The sport began about 50 years ago when surfing instructors would stand on their boards to take pictures. Since then, the sport has become popular because it is relatively easy to learn, provides physical benefits like improved strength and balance, and provides mental benefits such as stress belief and relaxation.

Customers are typically teenagers looking to experience the laid-back SUP lifestyle. SUP rides also promote water safety to its customers and employees. Of course, some things, like the weather, are out of their control, but the Hahn brothers believe that having a positive, fun attitude on the beach will help them attract customers. They have not spent any money on advertising and are the only company renting SUP boards in the area.

The brothers have been operating SUP rides for the past two summers. The business operates for three months,from June 1stto august 31st. They own four paddle boards, which they rent for$25 per houreach. They estimate that the boards are rented monthly for approximately 600 hours (4 boards x 30 days x 5 hours per day), bringing in monthly revenue of$15,000.

SUP rides hire a summer student Nadja, who is paid$15 per hourfor the 600 hours the paddle boards

are rented. Also, for each hour the paddle board is rented, the business incurs $3 in supply costs to wax and prepare the boards.

SUP rides incur fixed costs for its three months of operations, including rent and salary. The business rents a beachside kiosk from the local municipality for three months for$1,500 monthlyand stores the boards and other equipment in the Hahn parents' basement for free for the rest of the year. Michael is paid a salary of$1000 per monthfor three months because he works full-time for the business in the summer. The other brothers, Mathew, and Thomas, work full-time in the city and come up on weekends but are not involved in the business on a day-to-day basis. SUP rides purchased four boards two years ago for $900 each. The boards are depreciated on a straight-line basis and are expected to last three years.

While the brothers enjoy owning SUP rides, they believe the business has the potential to earn more income. Therefore, they are considering three independent options for next summer to try and boost the company's revenue and give them more money for school next year. Details for the three options are presented below.

Option 1

The brothers could extend their hours of operation to take advantage of longer daylight hours in the summer. They believe there is sufficient demand to rent SUP boards seven hours a day. There would be no change to their selling price or variable cost per unit, but Michael would want an additional $400 in salary to work in the evenings in the summer. Also, Nadja may not be available to work the extra hours, so they will need to hire another summer student to work the extra two hours a day. They are not sure who they will be able to hire and if that person will fit with SUP rides' culture.

Option 2

The brothers believe many people are reluctant to rent boards because they have never tried the sport. If they include a lesson in the first fifteen minutes of the rental time, they can increase their price to$40 per hour. They believe this will increase the hours the boards are rented to six hours per day (without having to operate in the evenings). Variable costs per unit would stay the same. Michael would provide the lessons, and the brothers agreed they would increase his monthly salary to$1600to recognize the extra work in giving lessons to the customers. Michael is happy to do this as he plans to apply to a teacher's college soon. Many of their customers are teenagers, and the teaching experience will look good on his application.

Option 3

Instead of extending their hours or offering lessons, the brothers believe that advertising would bring more customers to their location on the beach, and they would be able to increase the number of hours the boards are rented. They plan on spending$1000 per monthon advertising and promotion (including flyers, posters, and a website with basic information on SUP boards). Michael estimates this will allow them to rent the boards eight hours per day (assuming no change to the sales price, variable cost per unit, and other fixed costs). However, the other brothers need to be more convinced and think it is much money to spend on advertising.

The brothers are still determining which option will result in higher monthly income, which is best for their company, or if they should keep things as they are and be happy with their current income. They are also still determining some of their estimates. For example, in option 2, customers may not be willing to pay an extra$15for a 15-minute lesson, especially if it is part of the hour they are renting the boards. On the other hand, $35 would be more realistic initially, and they could always increase the price if they saw a significant increase in demand.

Qustions

Outline how the changing costs and volumes in each option would affect profit and the advantages and disadvantages of each option. Construct an analysis that examines all the calculations for the three options in detail and examines the contribution margin in the Cost-Volume-Profit study.