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Situation: You are the director of Blueline Tours, a company that operates tours throughout the United States. As a member of the senior leadership team,

Situation: You are the director of Blueline Tours, a company that operates tours throughout the United States. As a member of the senior leadership team, you have been asked to evaluate the following situations and provide a recommendation.

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 Mansion tour is given below:

Ticket revenue (100 seat capacity X 40% occupancy X $75 ticket price per person)

$3,000

100%

Variable Expenses ($22.50 per person) 900 30%
Contribution Margin 2,100 70%
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 fee, bus 50
Room and meals, bus driver and tour guide 175
Bus maintenance and preparation 300
Total Expenses 2,950 98%
Net operating loss $ (850) - 28%

The following additional information is available about the tour:

  • Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
  • The Bus maintenance and preparation cost above 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.
  • Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.
  • Liability insurance premiums are based on the number of buses in the companys fleet.
  • Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the numbers of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.

1. Retain Tour or Drop Tour

  1. Prepare an analysis showing what the impact will be on the companys profits if this tour is discontinued. Do you recommend dropping the tour? Explain.
  2. The companys tour director has been criticized because only about 50% of the seats on all of Bluelines tours are being filled as compared to an industry average of 60%. The tour director has explained that Bluelines 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.

2. Cost Volume profit

The CEO would now like to know the following:

  1. What is the break-even point for the Historic Mansions bus tour, in dollars and passengers, given the information provided above.
  2. How many passengers are needed on an Historic Mansions bus tour to earn $1,000 of profit?
  3. A group of 70 people is looking to book a tour if they can get a group discount. What price per person do you recommend charging this group?

What if the group is 85 people, does this change your recommended price?

3. Flexible Budgeting

Below are the planning and actual budgets for the month of May. Prepare a flexible budget report that shows both the revenue and spending variances and activity variances for the month.

  1. Did the Historic Mansions bus tour have a favorable or unfavorable month?
  2. What variances should be of concern to management?

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