Rainbow Tours gives walking tours of Springfield. Rainbow charges $50 per person

Question

Rainbow Tours gives walking tours of Springfield. Rainbow charges $50 per person for the tour and incurs $42 in variable costs for labor, drinks, and maps. The monthly fixed costs for Rainbow Tours are $2,720.

Rainbow Tours’s owner believes that 350 people a month will sign up for the walking tour. What is the margin of safety in terms of the number of people signing up for the tour?

Rainbow Tours gives walking tours of Springfield. Rainbow charges $50 per person for the tour and incurs $42 in variable costs for labor, drinks, and maps. The monthly fixed costs for Rainbow Tours are $2,720.

Explanation / Answer

Contribution Per Unit = Selling Price per Unit - Variable cost Per Unit

=> Contribution Per unit = $ 50 - $ 42 = $8

Fixed Cost per Month = $ 2720

Break even (in Units per Month) = Fixed Cost per Month / Contribution per Unit

= 2720 / 8 = 340 units

Conclusion = So the number of tours to be sold per month to break even is 340 Tours

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