Question
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
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 companys 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: Ticket revenue (110 seat capacity 40% occupancy $55 ticket price per person) $ 2,420 100 % Variable expenses ($11 per person) 484 20 % Contribution margin $ 1,936 80 % Tour expenses: Tour promotion $ 550 Salary of bus driver 230 Fee, tour guide 590 Fuel for bus 100 Depreciation of bus 230 Liability insurance, bus 100 Overnight parking fee, bus 50 Room and meals, bus driver and tour guide 150 Bus maintenance and preparation 190 Total tour expenses 2,190 Net operating loss $ (254) 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 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 companys 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: By how much will the profits increase or decrease if this tour is discontinued?
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