Adventure Expeditions offers guided back-country hiking/camping trips in Colombi
ID: 2486952 • Letter: A
Question
Adventure Expeditions offers guided back-country hiking/camping trips in Colombia Andes. Adventure provides a guide and all necessary food and equipment at a fee of $50 per person per day. Adventure currently provides an average of 600 guide-days per month in June, July, August, and September. Based on available equipment and staff, maximum capacity is 800 guide-days per month. Monthly variable and xed operating costs are as follows:
Variable Costs Per Person
Food $ 5
Guide salary 25
Supplies 2
Insurance 8
Total $ 40
Fixed Costs
Equipment rental $ 5,000
Administration 5,000
Advertising 2,000
Total $12,000
A. A French tour agency has proposed to place a special, one-time order for 75 guide-days at a
reduced fee of $45 per guide-day. The agency would pay all insurance costs. There would be additional xed administrative costs of $200.
Calculate the increase in revenues
Calculate the increase in cost for:
Food
Guide tour salary
Supplies
Administrative
iii) Show increase or decrease in profits.
B. An Italian tour agency has proposed to place a special, one-time order for 300 guide-days next
month at a special fee of $40 per guide-day. The agency would pay all insurance costs. There would
be additional xed administrative costs of $200. Assume additional capacity beyond 800 guide-
days is not available.
i) Calculate the increase in revenues
Calculate the increase in cost for:
Food
Guide tour salary
Supplies
Administrative
Opportunity cost of lost regular sales
iii) Show increase or decrease in profits.
C. An Alberta outdoor supply company has offered to supply all necessary food and camping
equipment at $7.50 per guide-day. This eliminates the current food costs and reduces the monthly
equipment rental costs to $1,800.
Cost to make Cost to buy
Cost to buy
Cost to make:
Food
Equipment rental
Total Costs
What is the advantage or disadvantage of buying
Should the offer be accepted? Why ?
D. Clients currently must carry a backpack and assist in camp activities such as cooking. Adventure is
considering the addition of mules to carry all food and equipment and the hiring of college students
to perform camp activities such as cooking. This will increase variable costs by $12 per guide-day
and xed costs by $1,000 per month. However, 600 full-service guide-days per month could now
be sold at $75 each.
Calculate increase in revenue:
Full service
Current service
Additional costs
Variable
Fixed
What is the advantage or disadvantage of selling without the inserts.
Explanation / Answer
a) Additional revenue 600 guide days 75 guide days Revenue = 50 x 600 guide days 30000 = 45 x 75 guide days 3375 Expenses Variable cost per persons Additional costs Food 5 3000 375 Guide Salary 25 15000 1875 Supplies 2 1200 150 Insurance 8 4800 0 Totral Variable cost 40 24000 2400 Fixed costs Equipment rental 5000 0 Administration 5000 200 Advertising 2000 0 Total Fixed costs 12000 200 Net Profit ( loss) -6000 775 there will be increase in profits of 775 b) Now if order is accepted, only 500 guide days will be provided to outsiders as 300 guide days will be provided to Italian Agency Totals if order Values under Normal Change in Revenue is accepted 600 guide days Value = 50 x 500 guide days 25000 25000 = 40 x 300 guide days 12000 12000 Total Revenue 37000 30000 7000 Increase Expenses Variable cost per persons Food 5 2500 1500 4000 3000 1000 Increase Guide Salary 25 12500 7500 20000 15000 5000 Increase Supplies 2 1000 600 1600 1200 400 Increase Insurance 8 4000 0 4000 4800 -800 Decrease Totral Variable cost 40 20000 9600 29600 24000 5600 Fixed costs Equipment rental 5000 0 5000 5000 0 Administration 5000 200 5200 5000 200 Increase Advertising 2000 0 2000 2000 0 Total Fixed costs 12000 200 12200 12000 200 Net Profit ( loss) -7000 2200 -4800 -6000 1200 Increase in profits c) Guide days Rate Cost Cost to buy 600 7.5 4500 Equipemt rental 1800 Total 6300 Cost to make food 600 5 3000 Equipemt rental 5000 Total 8000 Advantage of Buying 1700 = Cost of make - cost of buy = 8000-6300 Yes offer should be accepted as it reduces cost by $ 1700 d) Guide days Fee Revenue Existing 600 50 30000 New 600 75 45000 Increase in revenue 15000 Additional costs Guide days Cost Increase in Variable cost by 12 600 12 7200 Fixed costs 1000 Total Additional costs 8200 Advantage of hiring inserts 6800 = 15000 - 8200 There is disadvantage in selling without inserts, it is loss of additional income of 6800 per month
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