Question

Matt Simpson owns and operates Quality Craft Rentals, which offers canoe rentals and shuttle service on the Nantahala River. Customers can rent canoes at one station, enter the river there, and exit at one of two designated locations to catch a shuttle that returns them to their vehicles at the station they entered. Following are the costs involved in providing this service each year: Fixed CostsVariable Costs Canoe maintenance$ 3,100$ 9.00 Licenses and permits3,8000 Vehicle leases6,2000 Station lease7,7200 Advertising6,8007.00 Operating costs21,8007.00 Quality Craft Rentals began business with a $27,000 expenditure for a fleet of 30 canoes. These are expected to last 10 more years, at which time a new fleet must be purchased. Rentals have been stable at about 6,800 per year. Required: Matt is happy with the steady rental average of 6,800 per year. For this number of rentals, what price should he charge per rental for the business to make an annual 16% before-tax return on assets using life-cycle costs

Answer 1

The price that Quality Craft Rentals should charge per rental is $35.57.

Data and Calculations:

                               Fixed Costs    Variable Costs              Total Annual Costs

Canoe maintenance  $ 3,100       $61,200 ($9 x 6,800)             $64,300

Licenses and permits 3,800                  0                                        3,800

Vehicle leases            6,200                  0                                        6,200

Station lease               7,720                  0                                         7,720

Advertising                 6,800       $47,600 ($7 x 6,800)               54,400

Operating costs       21,800        $47,600 ($7 x 6,800)              69,400

Annual depreciation  ($27,000/10)                                                2,700

Total annual costs                                                                   $208,520

Before-tax return on assets                                                         33,363

Total costs + returns                                                               $241,883

Total rentals per year                                                                   6,800

Price to charge per rental                        ($241,883/6,800)  $35.57

Thus, the price per rental of $35.57 would ensure that Quality Craft Rentals makes an annual 16% before-tax return on assets using life-cycle costs.

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