Applications of Differential Analysis Adventure Expeditions offers guided back-c
ID: 2594133 • Letter: A
Question
Applications of Differential Analysis
Adventure Expeditions offers guided back-country hiking/camping trips in British Columbia. 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 fixed operating costs (valued in Canadian dollars) are as follows:
Variable Costs per Guide-Day
Food ...............................$5
Guide salary ........................25
Supplies............................2
Insurance...........................8
Total ...............................$40
Fixed Costs per Month
Equipment rental..................$5,000
Administration .....................5,000
Advertising ........................2 ,000
Total ..............................$12,000
Required
Determine the effect of each of the following situations on monthly profits. Each situation is to be evaluated independently of all others.
a. A $12 increase in the daily fee should result in a 150-unit decrease in monthly sales.
b. A $7 decrease in the daily fee should result in a 300-unit increase in monthly sales. However,
because of capacity constraints, the last 100 guide-days would be provided by subcontracting to
another firm at a cost of $46 per guide-day.
c. 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 ad-
ditional fixed administrative costs of $200.
d. 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 fixed administrative costs of $200. Assume additional capacity beyond 800 guide-days
is not available.
e. An Alberta outdoor supply company has offered to supply all necessary food and camping equip-
ment at $7.50 per guide-day. This eliminates the current food costs and reduces the monthly equip-
ment rental costs to $1,800.
f. 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 fixed costs by $1,000 per month. However, 600 full-service guide-days per month could now
be sold at $75 each
Explanation / Answer
Solution:
Fee per guide day = $50
Variable cost per guide day = $40
Contribution per guide day = $50 - $40 = $10
Fixed cost per month = $12,000
Existing Sale = 600 guide days
Existing monthly profit = 600*10 – 12000 = ($6,000)
Situation Analysis – Effect on monthly profits:
Revised sale = 600 – 150 =450 guide day
Revised monthly profit = 450*22 – 12000 = ($2,100)
Therefore monthly loss will be decreased by $3,900
Revised sale = 600 + 300 =900 guide day
However company is having capacity of 800 guide days and provides additional 100 guide days by sub-contracting to another firm at a cost of $46 per day
Therefore contribution for additional 100 units will be = ($50 - $7) - $46 = ($3)
Revised monthly profit = 800*3 – 12000 – 3*100 = ($9,900)
Therefore monthly loss will be increased by $3,900
If agency is ready to pay insurance cost then variable cost for special order = $40 - $8 = $32
Contribution for special order = $45 - $32 = $13 per guide day
Additional fixed cost for special order = $200
Profit for special order = 75*13 -200 = $775
Therefore loss for 1 month will decreased by $775 if order of French company accepted.
If agency is ready to pay insurance cost then variable cost for special order = $40 - $8 = $32
Contribution for special order = $40 - $32 = $8 per guide day
Additional fixed cost for special order = $200
Profit for special order = 300*8 - 200 = $2,200
However company is having capacity of 800 guide days and additional capacity is not available, therefore normal sale for special order month will be 500 guide days
Revised normal profit = 500*10 – 12000 = ($7,000)
Total Profit/(Loss) = $2200 - $7,000 = ($4,800)
Therefore loss for 1 month will decreased by $1,200 if order of Italian company accepted.
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