Golden 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 company's overall operating performance. 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: $3,300 660 $2,640 100% 20% 80% Ticket revenue (110 seat capacity ~ 40% occupancy * $75 ticket price per person) Variable expenses ($15 per person) Contribution margin Tour expenses: Tour promotion Salary of bus driver Fee, tour guide Fuel for bus Depreciation of bus Liability insurance, bus Overnight parking fee, bus Room and meals, bus driver and tour guide Bus maintenance and preparation Total tour expenses Net operating loss $ 680 360 720 160 360 210 80 190 230 2,990 $(350) 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 Golden Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff. 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 Golden's tours are being filled as compared to an industry average of 60%. The tour director has explained that Golden'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
