1. Merry, the Knight is a bookstore specializing in J. R. R. Tolkien and other fantasy literature. Recently, the bookstore has taken on a side business in New Zealand package tours of the places where the filming for the movie trilogy took place. The last three years results follow:

Year 2011 2012 2013

Sales in units (tours) 4,500 5,000 3,500

Sales Revenue ( $ 5,300 a tour) $ 23,850,000 $ 26,500,000 $ 18,550,000

Expenses

Travel costs $ 3,850,000 $ 3,500,000 $ 3,125,000

Meals and lodging 6,950,000 8,000,000 5,600,000

Guide salaries, and exp. 5,350,000 6,000,000 4,800,000

Insurance 1,300,000 1,300,000 1,300,000

Advertising 2,000,000 2,000,000 2,000,000

Net Operating Income $ 4,400,000 $ 5,700,000 $ 1,725,000

The budget is being written up for the 2014 season, in which demand is expected to head back up, and the expected number of tours sold is 4800. In order to estimate net operating income for 2014, an analysis of the costs of doing business so far needs to be done. Assuming that the last three years' costs can be used (they are typical and carefully compiled), identify each of the companys expenses as either a pure variable, a mixed, or a fixed expense. Using the hi-lo method, separate each of the mixed expenses into fixed and variable elements. Redo the companys expense totals (for all the expenses separately) at the 4800 units sales level, and use it to estimate net operating income. Finally, since the company expects to be able to sell 5,300 tours in 2015, what would you say they should estimate their operating income for that year to be, given the data?