Johnson's Boat Company

Tom Johnson is contemplating the introduction of boat services between Tiddleycove and Nicholas Island. Tom can rent boats on a monthly basis at $2,200 per boat per month. Each boat has a capacity of 70 passengers, and can make 6 one-way trips per day, 30 days a month. Tom decides on a fare of $5 per one-way trip.

Tom has estimated the following costs:

Ticket processing $0.40 per passenger

Taxes $0.60 per passenger

Gasoline $100.00 per one-way trip

Crew salaries $ 70.00 per one-way trip

Boat cleaning $ 20.00 per one-way trip

Shore costs vary with the number of boats in the following manner:

Number of boats Total Shore Costs

1 boat $11,000 per month

2 boats $12,000 per month

3 boats $15,000 per month

4 boats $16,000 per month

Tom recognizes that the daily demand for his services is uncertain, but that demand and frequency of services are interrelated. Table I below describes expected demand given various frequencies of service.

Table I

Number of one-way trips per day Expected passengers per one-way trip

1 - 6 one-way trips 65 passengers

7 - 12 one-way trips 64 passengers

13 - 16 one way trips (Not a typo) 61 passengers

17 - 24 one way trips 58.8 passengers

For the questions below assume that actual passenger demand equals expected passenger demand as described in the above table.

1) Determine the contribution margin per one-way trip in each step described in Table I.

2) What is the minimum number of one-way trips per month that are needed to break even? Are there multiple breakeven one-way trips? Calculate all of them. How do you interpret these?

(Hint: Remember there is a different breakeven every time there is a change in fixed costs)

3) Suppose that Tom has rented 2 boats and operates 12 one-way trips per day. How many days operation will result in breakeven?

4) Suppose that Tom has rented 3 boats and is stuck with them for a month. How many one-way trips per day should Tom operate?

5) Should Tom rent 2 boats or 3 boats a month?