Excel Cruiseline offers nightly dinner cruises off the coast of Nanaimo and Vict
ID: 2577341 • Letter: E
Question
Excel Cruiseline offers nightly dinner cruises off the coast of Nanaimo and Victoria. Dinner cruise tickets sell for $ 60 per passenger. Excel Cruiseline's variable cost of providing the dinner is $ 30 per passenger, and the fixed cost of operating the vessels (depreciation, salaries, docking fees, and other expenses) is $225,000 per month. Under these conditions, the break-even point in tickets is 7,500 and the break-even point in sales dollars is $450,000. 1. Suppose Excel Cruiseline cuts its dinner cruise ticket price from $ 60 to $ 50 to increase the number of passengers. Compute the new break-even point in units and in sales dollars. Explain how changes in sales price generally affect the break-even point. 2. Assume that Excel Cruiseline does not cut the price. Excel Cruiseline could reduce its variable costs by no longer serving an appetizer before dinner. Suppose this operating change reduces the variable expense from $ 30 to $ 15 per passenger. Compute the new break-even point in units and in dollars. Explain how changes in variable costs generally affect the break-even point.
Explanation / Answer
1.suppose the ticket price is cut to $50.
new break even point in sales dollars = fixed costs / CM ratio
here,
fixed costs = $225,000.
CM ratio = contribution / sales
=>($50 - $30)/$50
=>40%.
.=>$225,000 / 40%
=>$562,500.
break even point in units => fixed costs / contribution per unit
=>$225,000 / $20
=>11,250units
Generally speaking, an increase in sale price other things remaining constant , an increase in sale price will result in a decrease in break even point and vice versa.
2. variable expense reduces to $15 per passenger.
break even point in sales = fixed costs / CM ratio
here,
fixed costs = $225,000
CM ratio = ($60 - 15)/$60
=>0.75.
break even sales = $225,000 / 0.75
=>$300,000.
break even in units = $225,000 / ($60- $15)
=>5000 units.
Generally, all else remaining constant the break even point will decrease if variable cost decreases and increases if variable cost increases.
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