Cruisin\' with Lincoln Alumni After successfully earning a MBA, Lincoln alumni d

Question

Cruisin' with Lincoln Alumni After successfully earning a MBA, Lincoln alumni decide to form their own cruise ship company based out of San Francisco. Lincoln Alumni cruises o and to the Hawaiian Islands. They are debating what to do with their existing ship, S.s Mission Bay which was built 15 years ago for $90 M and is now fully depreciated. To replace the would cost S180M and its current market value is $150M. Lincoln Alum ffers luxury trips along the Pacific Coast ni Cruises' cost of capital is 15%. Lincoln Alumni, dusting off some accounting materials, were able to det for a two-week cruise to Alaska, which would be a change from a three week cruise from travelling down to Guatemala. Here are their estimates (based on 2,000 passengers per cruise termine the operating costs and 25 cruises per year) PER CRUISE Variable Costs Fixed Costs 750,000 750,000 Labor Food Fuel Port fees and services Marketing, ads, promotion Supplies Totals 150,000 75,000 650,000 125,000 350,000 150,000 1,500,000 500,000 a Assuming that the two-week Alaskan cruise will be priced at $2,000 per passenger, please calculate the break-even number of passengers per cruise based on the data above. b. What do the Lincoln Alumni need to consider beyond these estimates, and if they included this what would happen to the break-even point? Would there be an issue if the max capacity of the ship was HINT: Please calculate the OPPORTUNITY COST and compare against its capacity

Explanation / Answer

Answer:

1

Before the break-even point can be calculated, the variable cost per passenger is computed as

Variable cost per passenger

= $2,000,000/ 2,000

= $1000

Contribution margin per passenger

= $2000-1000

= $1,000

Break-even number of passengers

= Fixed Cost/Contribution margin

=$1,500,000 /1000

= 1,500 passengers

__________________________________________

B)

Here we can see that cost of the ship itself is not included. The weekly opportunity cost of the Mediterranean cruise is not using the ship elsewhere

It need to consider estimate about cost of capital in their above estimates about fixed costs.

Sales proceeds

180,000,000

x Interest rate

15%

      27,000,000

Cost of capital to be considered per cruise

= ($180 million * 15%) / 25 cruises

= $1,080,000 per cruise.

Revised break even number of passengers would be

= $1,500,000+1,080,000 / 1000

= 2580 passenger

Sales proceeds

180,000,000

x Interest rate

15%

      27,000,000

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