QUESTION ONE

Pacific Cruises provides standard riverboat cruises for tourists on the Hawkesbury River. The average cruise has 90 passengers on board. Each passenger pays $100 for a day's cruising. The riverboat cruises 120 days each year in meeting current demand. There are 14 crew who are each paid an average of $130 per cruise. The crew is paid only when the boat sails. Other variable costs are for refreshments, which average $20 per passenger per cruise, and fuel which averages $400 per cruise. Total annual fixed costs are $380,000.

REQUIRED

(a)Calculate revenue and variable costs for each cruise.

(3 marks)

(b)Calculate the number of cruises needed annually to break even.

(3 marks)

(c)Using the contribution margin approach calculate the number of cruises needed to annually earn $500,000 profit over breakeven. Discuss whether this profit goal is realistic under current conditions and possible assumptions and limitations of the "cost / volume / profit model" at such higher volume levels. (word limit 60)

(3+3= 6 marks)

(d)Pacific Cruises is considering replacing the existing one-day cruises as detailed above with a one-day luxury cruise costing more at $180 per passenger. Under this new proposal it is estimated that demand will increase, requiring the boat to cruise for 150 days each year with each cruise taking 50 passengers. Other costs to change from the original offer include refreshments, up from $20 to $30 per passenger, and annual fixed costs to increase from $380,000 to $450,000. All other variable costs remain the same per passenger as per the standard cruise offer.

(i)Calculate the number of cruises needed annually to break even.

(ii)Given Pacific Cruises wants to maximize total yearly profit discuss, justifying your answer, whether they should continue with the existing standard cruise or replace it with the luxury cruise. Comment on the level of risk of each proposal and the possibility of making a loss.(Please note the boat has the same useful life / residual value under either the standard or luxury offer. The boat remains docked at the harbour when not in use having no alternate use.) Show all workings/ calculations as part of your answer.

(3+4= 7 marks)

(e)Explain to Pacific Cruises' management how they would be able to integrate cost-volume-profit analysis into their broader planning.As part of your answer, discuss three ways to increase profit and explain how cost volume profit analysis is useful in evaluating the different alternatives considered.

(6 marks)