CVP analysis, service firm. Lifetime Escapes generates average revenue of $7,500

ID: 2597240 • Letter: C

Question

CVP analysis, service firm. 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: $1,600 3,100 600 300 700 $6,300 Airfare Hotel accommodations Meals Ground transportation Park tickets and other costs Total Annual fixed costs total $570,000. 1. Calculate the number of package tours that must be sold to break even. 2. Calculate the revenue needed to earn a target operating income of $102,000. 3. If fixed costs increase by $19,000, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement 1? 4. The general manager at 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 original 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? Step-by-step solution

Explanation / Answer

Per Package

Revenue

$ 7,500

Variable Cost

$ 6,300

Contribution Margin

$ 1,200

Breakeven packages = Fixed cost/CM per package = $ 570,000/$ 1,200 = 475 packages

Contribution Margin ratio = Contribution Margin per Package/Selling price

= ($ 1,200/$ 7,500) x 100 = 0.16 x 100 = 16 %

Revenue required to get target income

= (Fixed cost + Target Operative Income)/Contribution Margin ratio

= ($ 570,000 + $ 102,000)/0.16 = $ 672,000/0.16 = $ 4,200,000

No. of packages = $ 4,200,000/$ 7,500 = 560 packages

Revenue need to earn $ 102,000 operating Income is $ 4,200,000 or 560 packages

New fixed cost = $ 570,000 + $ 19,000 = $ 589,000

Breakeven packages = Fixed cost/CM per package

CM per package = Fixed cost/ Breakeven packages

= $ 589,000/475 = $ 1,240

New Variable cost per packages = New Fixed cost – New CM = $ 7,500 - $ 1,240 = $ 6,260

Decrease in Variable cost per person = $ 6,300 - $ 6,260 = $ 40

New sales price per package = $ 8,200

New CM per package = New sales – Variable cost = $ 8,200 - $ 6,300 = $ 1,900

New Breakeven packages = Fixed cost/New CM per package

= $ 570,000/$ 1,900 = 300 packages

The number sales of tour packages may decrease, if price of tour package increase from $ 7,500 to

$ 8,200. So manger should consider the marketing & popularity before decide to increase the price.