Blueline Tours, Inc., operates tours throughout the United States. A study has i

Question

Blueline Tours, Inc., operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the company's overall operating performance. One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below: The following additional information is available about the tour: Bus drivers are paid fixed annual salaries: tour guides are paid for each tour conducted The "Bus maintenance and preparation" cost on the previous page is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible. Liability insurance premiums are based on the number of buses in the company's fleet. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff. By how much will the profits increase or decrease if this tour is discontinued?

Explanation / Answer

Dropping the Tour:

Decrease in revenue                  : 3,450

Cost saved due to dropping the tour:

Variable cost                     : 644

Tour promotion                  : 750

Tour fee guide                   : 730

Fue for bus                        :160

Overnight parking               : 60

Room and meals                : 185

Total expense saved         :2,529

Total profit decrease ( 3,450 - 2, 529)   921/-

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