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    Managerial Accounting: BUS 5110 Unit 3 Written Assignment Term 2, 2022

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    This 3-year analysis of a parasailing company calculates key financial metrics like contribution margin, break-even points, and flights needed to achieve a profit target. In year 1, the break-even is 894 flights. In year 2, a new 2% referral fee lowers the contribution margin, raising the break-even to 969 flights. In year 3, the same referral fee applies, requiring 1210 flights to earn a $10,000 profit. While contribution margins look promising, the bank may need more information given unaccounted risks.

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    Managerial Accounting: BUS 5110 Unit 3 Written Assignment Term 2, 2022

    Uploaded by

    seles23734
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    This 3-year analysis of a parasailing company calculates key financial metrics like contribution margin, break-even points, and flights needed to achieve a profit target. In year 1, the break-even is 894 flights. In year 2, a new 2% referral fee lowers the contribution margin, raising the break-even to 969 flights. In year 3, the same referral fee applies, requiring 1210 flights to earn a $10,000 profit. While contribution margins look promising, the bank may need more information given unaccounted risks.

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    This 3-year analysis of a parasailing company calculates key financial metrics like contribution margin, break-even points, and flights needed to achieve a profit target. In year 1, the break-even is 894 flights. In year 2, a new 2% referral fee lowers the contribution margin, raising the break-even to 969 flights. In year 3, the same referral fee applies, requiring 1210 flights to earn a $10,000 profit. While contribution margins look promising, the bank may need more information given unaccounted risks.

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    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    45 views5 pages

    Managerial Accounting: BUS 5110 Unit 3 Written Assignment Term 2, 2022

    Uploaded by

    seles23734
    This 3-year analysis of a parasailing company calculates key financial metrics like contribution margin, break-even points, and flights needed to achieve a profit target. In year 1, the break-even is 894 flights. In year 2, a new 2% referral fee lowers the contribution margin, raising the break-even to 969 flights. In year 3, the same referral fee applies, requiring 1210 flights to earn a $10,000 profit. While contribution margins look promising, the bank may need more information given unaccounted risks.

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    3-year analysis of a parasailing company

    Managerial Accounting
    BUS 5110

    Unit 3 Written Assignment

    Term 2, 2022

    University of the People

    November, 2021
    Introduction:

    The contribution margin is computed by subtracting the variable costs, both product and non-manufacturing,

    of a business from its sales revenue (Heisinger & Hoyle, n.d.). The value achieved is what should be

    expected to cover fixed costs and contribute to profit. Variable costs are costs that vary in total based on the

    volume of sales while fixed costs are those that do not change with change in volume of sales (Gallo, 2017)

    Calculation of data for year1:

    To solve the parasailing company case, we should categorize the income, variable costs, and fixed costs and

    calculate the annual costs. The income is $175 per flight. Variable costs per flight are $100 in fuel per flight

    and a $30 boat crew fee. The fixed costs are monthly and include a $350 loan payment, $2500 scheduler

    salary and $500 dock fee for a total of $3350. This monthly fee results in a fixed annual cost of $40,200.

    Annual fixed costs = (Loan payment+dock fee+scheduler salary)* 12 months

    = (350+500+2500)*12 = $ 40,200

    Contribution margin can now be calculated by subtracting the variable costs from the revenue (Walther &

    Skousen, 2009, p. 50).The contribution margin per flight comes to around $45 after subtracting variable

    costs of fuel cost and boat crew fee from the flight price.

    Contribution margin per flight = Price per flight- variable cost per flight

    = 175-(30+100)= $ 45
    Now the number of breakeven flights can be calculated. It is the number at which the company just sustains

    itself, i.e., without profit or loss. This can be calculated by dividing the annual costs by the contribution

    margin.

    Break-even quantity = fixed cost/contribution margin = 40200/45=893.33.

    Since we can’t do partial unit sales in this business, we also need to round up to the next whole number to

    calculate the breakeven cost without risking debt. So, the break-even number in this case should be 894

    flights.

    Contribution margin ratio = contribution margin/price per flight= 45/175 = 0.2571

    Calculation of data for year2:

    If we add a 2% referral cost per flight, that equates to $3.50 per flight for a referral.

    While it’s not realistic to assume that every flight is a referral, it is the worst-case forecasting scenario. If we

    assume the worst-case cost scenario, the contribution margin per flight becomes $41.50.

    Contribution margin per flight = Price per flight- variable cost per flight

    = 175-(30+100+2% of 175)= $ 41.5

    New break-even number of flights =fixed cost/contribution margin = 40200/41.5 =968.67

    Again rounding off to higher integer, we need 969 flights to breakeven.


    Contribution margin ratio = contribution margin/price per flight= 41.5/175 = 0.2371

    Calculation of data for year3:

    Since we continue to have 2% referral scheme for the 3rd year also, the contribution margin would be the

    same as calculated for the second year.

    Contribution margin per flight = Price per flight- variable cost per flight

    = 175-(30+100+2% of 175)= $ 41.5

    Since, we need to retain a profit of $10,000, we can calculate the number of flights to be taken as:

    Flights to be taken = (fixed cost+ required profit)/ contribution margin

    = 40,200+10,000/41.5=1209.63

    Rounding off to the highest integer, we need 1210 flights to be taken to retain the required profit.

    Loan issuance:

    Based solely on the contribution margin and contribution margin percentage figures, bank should not have a

    problem granting a loan as the company shows promise. But, digging deeper, since the risks associated with

    the company like depreciation, insurance and competition are not considered, bank may ask for additional

    information to process the grant of loan.


    References:

    Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Retrieved from

    https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-

    accounting.pdf

    Gallo, A. (2017). Contribution Margin: What It Is, How to Calculate It, and Why You Need It. Harvard

    Business Review. Retrieved 27 November 2021, from https://hbr.org/2017/10/contribution-margin-

    what-it-is-how-to-calculate-it-and-why-you-need-it.

    Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for

    Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html

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