Relevant Revenues and Costs

Scenario

Brad Winston is the owner and operator of Fishing Unlimited, a charter fishing business operated out of Oregon Inlet, NC. Brad has been taking groups of guests offshore to fish for tuna and marlin for over 15 years. He purchased his current fishing boat when he started the business, but now believes that a larger and better outfitted vessel would allow him to increase the rate he charges per charter. Currently he can carry a maximum of 6 guests while the larger boat will carry up to 8. The larger boat would also require him to take 2 deck hands on each outing, providing better service to his customers. Cost data for Brads business is shown in the table below.

Fishing Unlimited

Annual straight-line depreciation on boat

$ 8,300

($175,000 original cost $90,000 estimated resale value/20 years)

Fuel Cost (per hour)

$ 50

Insurance Premium (annual)

$ 1,900

Maintenance and Repairs (annual)

$ 3,500

Fishing Tackle and Gear (original cost)

$ 7,000

Tackle and Bait (per guest)

$ 20

Deck Hand wages (per hour)

$ 20

Dock Fees (annual)

$ 2,400

Captain's License (annual)

$ 200

Food and Beverages (per guest)

$ 25

Professional Fees (per year)

$ 750

Dock Utilities (annual)

$ 1,200

Brad has someone interested in purchasing his existing boat for $80,000. He could use this cash as a deposit on the new boat which will cost him $225,000. His banker estimates the payments on the new boat will be about $1,500. The new boat is more fuel efficient and he believes he can cut his fuel costs by 10% but the more expensive boat will increase his insurance premium by 12%. He is also concerned that he will have to change to a larger boat slip which would increase his dock fees by 5%. The good thing about the new boat is that he should save on maintenance and repairs, at least for the first 3 years. The only other expense Brad would incur with the new boat is adding some additional fishing tackle and gear to accommodate larger parties that he estimates would cost him about $1,500.

His fees for both the old and the new boat are as follows:

Old Boat

New Boat

4 hours

$ 550

$ 600

6 hours

$ 650

$ 700

Full Day (9 hours)

$ 1,100

$ 1,200

Questions

1. Which costs are relevant to Brads decision to purchase a new, larger boat?

2. If Brad decides to purchase a larger boat, what costs will be affected by this decision? Will they increase or decrease?

3. Identify any unavoidable costs associated with the operation of Fishing Unlimited.

4. Calculate the revenue generated by a 6-hour trip with the old boat (6 guests) and the new boat (8 guests) and compare the two figures. Identify the costs that changed. What conclusion can you draw based on your analysis?