P4-33. Applications of Differential Analysis

Adventure Expeditions offers guided back-country hiking/camping trips in British Columbia. Adven-

ture provides a guide and all necessary food and equipment at a fee of $50 per person per day. Adven-

ture currently provides an average of 600 guide-days per month in June, July, August, and September.

Based on available equipment and staff, maximum capacity is 800 guide-days per month. Monthly

variable and fixed operating costs (valued in Canadian dollars) are as follows:

Variable Costs per Guide-Day Fixed Costs per Month

Food .......................... $ 5 Equipment rental ............... $ 5,000

Guide salary .................... 25 Administration ................. 5,000

Supplies ....................... 2 Advertising .................... 2,000

Insurance ...................... 8 Total ......................... $12,000

Total .......................... $40

Required

Determine the effect of each of the following situations on monthly profits. Each situation is to be

evaluated independently of all others.

a. A $12 increase in the daily fee should result in a 150-unit decrease in monthly sales.

b. A $7 decrease in the daily fee should result in a 300-unit increase in monthly sales. However,

because of capacity constraints, the last 100 guide-days would be provided by subcontracting to another firm at a cost of $46 per guide-day.

c. A French tour agency has proposed to place a special, one-time order for 75 guide-days at a

reduced fee of $45 per guide-day. The agency would pay all insurance costs. There would be ad-

ditional fixed administrative costs of $200.

d. An Italian tour agency has proposed to place a special, one-time order for 300 guide-days next

month at a special fee of $40 per guide-day. The agency would pay all insurance costs. There would

be additional fixed administrative costs of $200. Assume additional capacity beyond 800 guide-days

is not available.

e. An Alberta outdoor supply company has offered to supply all necessary food and camping equip-

ment at $7.50 per guide-day. This eliminates the current food costs and reduces the monthly equip-

ment rental costs to $1,800.

f. Clients currently must carry a backpack and assist in camp activities such as cooking. Adventure is

considering the addition of mules to carry all food and equipment and the hiring of college students

to perform camp activities such as cooking. This will increase variable costs by $12 per guide-day

and fixed costs by $1,000 per month. However, 600 full-service guide-days per month could now at $75 each.