Question

Lifetime Escapes generates average revenue of $7,500 per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows:
Airfair.............................$1,600

Hotel .............................$3,100

Meals.............................600

Transportation................300

Park tickets/other costs...700

Total...............................$6,300

A] Calculate the number of package tours that must be sold to break even.

B]Calculate the revenue needed to earn a target operating income of $102,000.

C] If fixed costs increase by $19,000, what decrease in variable cost er person must be achieved to maintain the breakeven point calculated in A.

D]The general manager of Lifetime Escapes proposes to increase the price of the package tour to $8,200 to decrease the breakeven point in units. Using information in the origional problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?

Answer 1

Answer:

A) 475 units

B) $4,200,000

C) Variable cost per unit = $6,260

D) break-even = 300 packages

Explanation:

A) We know,

In a certain point, when a company does not get any profit but does not experience any loss, it is termed as break-even point.

The formula to calculate the break-even in units = $\frac{Fixed Cost}{Selling price per unit - Variable cost per unit}$

Given,

Fixed cost = $570,000

Variable costs per unit = (Air Fare + Hotel + Meals + Transportation + Park tickets) = $(1,600 + 3,100 + 600 + 300 + 700) = $6,300

Selling price per unit = $7,500

Putting the values into the formula,

Break-even per package = $\frac{570,000}{7,500 - 6,300}$

Break-even per package = 475 units

B) When a target profit is given, the formula to find the break-even is slightly different.

Break-even in units = $\frac{Fixed Cost + Target profit}{Selling price per unit - Variable cost per unit}$

From A, FC = $570,000; VC per unit = $6,300 and Selling price per unit = $7,500

And Target profit in question B = $102,000

Break-even per package = $\frac{570,000 + 102,000}{7,500 - 6,300}$

Break-even per package = 560

Break-even in dollars (revenues) = $7,500 × 560 = $4,200,000

C) If fixed costs increases by $19,000, the new fixed costs = $570,000 + 19,000 = $589,000.

According to the question, we have to keep the break-even point in 475 units by reducing the variable costs. Therefore, selling price per person will remain same.

Therefore, break-even per package = $\frac{Fixed Cost}{Selling price per unit - Variable cost per unit}$

475 packages = $\frac{589,000}{7,500 - VC per unit}$

or, 475 × ($7,500 - VC per unit) = $589,000

or, $3,562,500 - 475 VC per unit = $589,000

or, - 475 VC per unit = $589,000 - 3,562,500

or, - 475 VC per unit = -$2,973,500

or, Variable cost per unit = $2,973,500 ÷ 475 [multiplying both sides by -1]

or, Variable cost per unit = $6,260

D) As the general manager wants to increase the selling price to $8,200 from $7,500, the break-even package per person will reduce. The new break-even package per person will be as follow:

From A, FC = $570,000; VC = $6,300

Therefore, break-even per package = $\frac{Fixed Cost}{Selling price per unit - Variable cost per unit}$

Break-even per package = $\frac{570,000}{8,200 - 6,300}$

break-even per package = 300

Manager should consider one important thing. The first one is whether they can sell it more frequently than previous time. Therefore, if the manager wants to lower the break-even point, it will not make the best use of it.