Pacific Cruises provides standard riverboat cruises for tourists on the Hawkesbury River. The average cruise has...

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Pacific Cruises provides standard riverboat cruises for tourists onthe Hawkesbury River. The average cruise has 90 passengers onboard. Each passenger pays $100 for a day’s cruising. The riverboatcruises 120 days each year in meeting current demand. There are 14crew who are each paid an average of $130 per cruise. The crew ispaid only when the boat sails. Other variable costs are forrefreshments, which average $20 per passenger per cruise, and fuelwhich averages $400 per cruise. Total annual fixed costs are$380,000.

REQUIRED
(a) Calculate revenue and variable costs for eachcruise.

(b) Calculate the number of cruises needed annually to breakeven.

(c) Using the contribution margin approach calculate thenumber of cruises needed to annually earn $500,000 profit overbreakeven. Discuss whether this profit goal is realistic undercurrent conditions and possible assumptions and limitations of the“cost / volume / profit model” at such higher volume levels. (wordlimit 60)

(d) Pacific Cruises is considering replacing the existingone-day cruises as detailed above with a one-day luxury cruisecosting more at $180 per passenger. Under this new proposal it isestimated that demand will increase, requiring the boat to cruisefor 150 days each year with each cruise taking 50 passengers. Othercosts to change from the original offer include refreshments, upfrom $20 to $30 per passenger, and annual fixed costs to increasefrom $380,000 to $450,000. All other variable costs remain the sameper passenger as per the standard cruise offer.
(i) Calculate the number of cruises needed annually to breakeven.

(ii) Given Pacific Cruises wants to maximize total yearlyprofit discuss, justifying your answer, whether they shouldcontinue with the existing standard cruise or replace it with theluxury cruise. Comment on the level of risk of each proposal andthe possibility of making a loss. (Please note the boat has thesame useful life / residual value under either the standard orluxury offer. The boat remains docked at the harbour when not inuse having no alternate use.) Show all workings/ calculations aspart of your answer. (limit 80 words)

(e)Explain to Pacific Cruises’ management how they would beable to integrate cost-volume-profit analysis into their broaderplanning. As part of your answer, discuss three ways to increaseprofit and explain how cost volume profit analysis is useful inevaluating the different alternatives considered. (150 wordslimit)

Answer & Explanation Solved by verified expert

4.2 Ratings (601 Votes)

Standard cruise aRevenue and variable costs for each cruise Revenue per cruise 90100 9000 Variable costs cruise Crew wages 14130 1820 Cost of Refreshments 2090 1800 Cost of Fuel 400 Total Variable costs cruise 4020 bNumber of cruises needed annually to break even Revenue per cruise 9000 Less Variable costs cruise 4020 Contributioncruise 4980 Annual Fixed costs 380000 No of cruise needed annually to breakeven Fixed costsContribution per cruise ie 3800004980 76 Cruises cNo of cruises needed to annually earn 500000 profit over breakeven Annual See Answer

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Pacific Cruises provides standard riverboat cruises for tourists onthe Hawkesbury River. The average cruise has 90 passengers onboard. Each passenger pays $100 for a day’s cruising. The riverboatcruises 120 days each year in meeting current demand. There are 14crew who are each paid an average of $130 per cruise. The crew ispaid only when the boat sails. Other variable costs are forrefreshments, which average $20 per passenger per cruise, and fuelwhich averages $400 per cruise. Total annual fixed costs are$380,000.REQUIRED(a) Calculate revenue and variable costs for eachcruise.(b) Calculate the number of cruises needed annually to breakeven.(c) Using the contribution margin approach calculate thenumber of cruises needed to annually earn $500,000 profit overbreakeven. Discuss whether this profit goal is realistic undercurrent conditions and possible assumptions and limitations of the“cost / volume / profit model” at such higher volume levels. (wordlimit 60)(d) Pacific Cruises is considering replacing the existingone-day cruises as detailed above with a one-day luxury cruisecosting more at $180 per passenger. Under this new proposal it isestimated that demand will increase, requiring the boat to cruisefor 150 days each year with each cruise taking 50 passengers. Othercosts to change from the original offer include refreshments, upfrom $20 to $30 per passenger, and annual fixed costs to increasefrom $380,000 to $450,000. All other variable costs remain the sameper passenger as per the standard cruise offer.(i) Calculate the number of cruises needed annually to breakeven.(ii) Given Pacific Cruises wants to maximize total yearlyprofit discuss, justifying your answer, whether they shouldcontinue with the existing standard cruise or replace it with theluxury cruise. Comment on the level of risk of each proposal andthe possibility of making a loss. (Please note the boat has thesame useful life / residual value under either the standard orluxury offer. The boat remains docked at the harbour when not inuse having no alternate use.) Show all workings/ calculations aspart of your answer. (limit 80 words)(e)Explain to Pacific Cruises’ management how they would beable to integrate cost-volume-profit analysis into their broaderplanning. As part of your answer, discuss three ways to increaseprofit and explain how cost volume profit analysis is useful inevaluating the different alternatives considered. (150 wordslimit)