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Blueline 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:

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 Blueline 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 Blueline's tours are being filled as compared to an industry average of 60%. The tour director has explained that Blueline'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.

1 Given Data P12-18: BLUELINE TOURS, INC. 4 5 Seat capacity 100 6 Occupancy 40% 7 Ticket price 75 9 Ticket revenue 3.000 100,0% 10 Variable expenses 900 30,0% 11 Contribution margin 2.100 70,0% 12 Tour expenses: 13 Tour promotion 600 14 Salary of bus driver 350 15 Fee, tour guide 700 16 Fuel for bus 125 17 Depreciation of bus 450 18 Liability insurance, bus 200 19 Overnight parking fee, bus 50 20 Room and meals, bus driver and tour guide 175 21 Bus maintenance and preparation 300 22 Total tour expenses 2.950 23 Net operating loss (850) 24BLUELINE TOURS. INC. Analysis of Discontinuing Tour Contribution margin lost if the tour is discontinued $ (2.100) Less tour costs that can be avoided if the tour is discontinued: Tour promotion 600 ..... Fee, tour guide 700 Fuel for bus 125 Overnight parking fee, bus 50 Room & meals, bus driver and tour guide 175 1.650 Net decrease in profits if the tour is discontinued $ (450) Correct! BLUELINE TOURS. INC. Alternative Analysis of Discontinuing Tour Difference: Net Operating Keep Drop Income the the Increase or Tour Tour [Decrease] Ticket revenue $ 3.000 Less variable expenses 900 Contribution margin $ 2.100 Less tour expenses: Tour promotion 600 Salary of bus driver 350 Fee, tour guide 700 Fuel for bus 125 Depreciation of bus 450 Liability insurance, bus 200 Overnight parking fees, bus 50 Room & meals, bus driver and tour guide 175 Bus maintenance and preparation 300 Total tour expenses 2.950 Net operating loss $ (850