Written Assignment’

You are the owner of a parasailing company that is expanding operations to a new beachfront

location, and you need to prepare a 3-year analysis for the bank that may loan you the funds

to purchase your boat and parasailing equipment. A lot of business is done on a referral basis,

where a company pays a fee to a 3rd party to send them customers. However, because of your

well-established reputation, you already have received requests for “flights” to be scheduled

as soon as you open the new location. Therefore, you expect to break-even the first year but

must calculate the number of flights needed. You also need to determine the new break-even

point in Year 2 if the location allows referrals, which you believe will cost on average about

2% of the sales price overall. Finally, you need to determine the volume needed to have

$10,000 in profit in Year 3. The following information is available:

 Sales price per flight $175, Estimated loan payment per month $350, Fuel costs per

flight $100, Full-time scheduler salary $2,500 per month, Boat crew per flight $30 &

$500 per month dock fee and use of a small office on the pier

Requirements:

 Calculate the Year 1 break-even quantity, contribution margin per unit, and

contribution margin ratio. Explain how the values were determined.

 Calculate the Year 2 break-even quantity, break-even sales, and contribution margin

ratio. Explain how the values were determined.

 Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3,

assuming the company does allow for referrals.

 Recommend if the bank should issue the loan.

Skousen, 2009). It reflects the available amount from sales after deducting variable costs

associated with the product that is available to cover the fixed costs.

The contribution margin and the contribution margin ratio are calculated as follows:

Contribution margin = sales revenue- variable costs

Contribution margin ratio= (sales revenue – variable costs) / sales revenue

To solve the problem at hand, firstly there is need to identify and categorize the revenue, the

variable costs, the fixed costs and the annual costs. Income is the total amount that comes

from selling goods and services (Konstantina, 2021). In this case the revenue is $175 per

flight. The variable costs are those costs that vary with production levels (Zoger & Zoger ,

2006). Our variable costs in this case are $100 of fuel per flight and $30 for boat crew per

flight. Fixed costs are costs that do not change with changes in amount of goods or services

produced. In this case our fixed costs are per month and they include salary at $2,500, the

loan repayment at $350 and docking fee at $500. This gives a total of $3,350 per month and

translates to $40,200 per year.

Year 1

Once the costs and incomes have been identified, the contribution margin can be calculated

by deducting the variable costs from the revenue. In this case the contribution margin is equal

to the flight price less the variable costs.

Contribution margin=$175 - $130 (fuel price per flight $100 and the boat crew cost per flight

$30)
Thus the contribution margin is $45 per flight. The contribution margin ratio is equal to $45

divided by $175 which is 0.26. Thus the contribution margin percentage is equal to $45

divided by $175 and expressed as a percentage. Thus it is about 26%. Thus for every $1

increase in revenue the company gets 26cents increase in margin.

We then can calculate the break-even number of flights which are the number of flights the

company needs in a year for it to be able to cover its costs. This is calculated by dividing the

annual costs by the margin.

Break even flights= $40,200 /$45 = 893.3

We need to round up since there are no partial flights. Thus the break- even number of flights

is 894 annual or 75 flights per month. This number of flights will give us a total revenue of

$156,450 annually.

Year 2

For year 2 assuming the company is now paying referral cost which is 2% of the sale price.

Referral cost: 2% of $175= $3.50

The referral price will be $3.50 per flight and this will be variable cost.

Assuming that all flights will be referrals the variable costs will be $133.50 per flight.

Contribution margin =$175-$133.50= $41.50

Contribution margin ratio= $41.50 / $175 = 0.24

24%. The break-even number of flights per annum will be calculated by dividing the fixed

costs by the contribution margin.

Break even flights= $40,200 / $41.50 = 968.67

This is rounded up, thus the break-even number of flights for year 2 will be 969. From a total

of 969 flights the company will have a total of $169,575 sale revenue annually.

Year 3

For year 3, assuming that the company is working with referrals only of 2% per flight which

is $3.50 per flight. Assuming that the company wants to have a profit of $10,000, in order to

calculate the number of flights we need to first add the $10,000 to the annual fixed cost. Thus

$40,200 plus $10,000 we get $50,200. We then divide this with the contribution margin to get

the number of flights. Thus $50,200 divided by $41.50. The number of flights that we get is

1,209.64. This is rounded up to 1,210. Thus the number of flights needed to have a profit of

$10,000 is 1,210 flights annually.

Recommendations for a bank loan

Although the information presented shows that the pricing may be profitable, there is no

report on research carried out on the market. This market research would assist on the

possible number of flights this new location would offer.

There is need to have a market research that would show the volume of clients as well as the

level of demand that can warrant to venture into this new location. This research would also
reveal the other competitors that are there and the level of competition the company would

face.

Furthermore, the costs given are not adequate. There is no costing on depreciation on the

equipment being used. There is also no insurance cost to assist in times of mishap. With

information at hand it is very difficult to make a decision whether the bank should extend a

loan to the company.

References

Konstantina, R. (2021). The role of management accounting in the decision making process

of SME in UK. Researchgate, 5(2). Retrieved from

https://www.researchgate.net/publication/352373898

Smith , J. H. (2001). The income statement. University of New Brunswick: Technology

Management and Entrepreneurship, Faculty of Engineering .

Walther, L. M., & Skousen, C. J. (2009). Managerial and cost accounting. Retrieved 02 10,

2022, from

https://library.ku.ac.ke/wp-coontent/downloads/2011/08/Bookboon/Acoounting/

managerial-cost-accounting.pdf

Zoger, K., & Zoger , L. (2006). The role of financial information in decision making process.

Innovative Marketing.