Problem 12-18 Dropping or Retaining a Tour [LO2]

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 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 (105 seat capacity 40% occupancy $75 ticket price per person)	$	3,150	100	%
Variable expenses ($11.00 per person)		462	14.7
Contribution margin		2,688	85.3	%
Tour expenses:
Tour promotion	$	700
Salary of bus driver		390
Fee, tour guide		740
Fuel for bus		165
Depreciation of bus		480
Liability insurance, bus		180
Overnight parking fee, bus		60
Room and meals, bus driver and tour guide		185
Bus maintenance and preparation		280
Total tour expenses		3,180
Net operating loss	$	(492)

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 companys 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 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.