Lifetime Escapes generates average revenue of 7,500 per...

Lifetime Escapes generates average revenue of $\$ 7,500$ per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows: $$\begin{array}{lr} \text { Airfare } & \$ 1,600 \\\text { Hotel accommodations } & 3,100 \\\text { Meals } & 600 \\\text { Ground transportation } & 300 \\\text { Park tickets and other costs } & 700 \\\text { Total } & \frac{11}{\$ 6,300}\end{array}$$ Annual fixed costs total $\$ 570,000$ 1. Calculate the number of package tours that must be sold to break even. 2. Calculate the revenue needed to earn a target operating income of $\$ 102,000$. 3. If fixed costs increase by $\$ 19,000$, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement $1 ?$ 4. The general manager at Lifetime Escapes proposes to increase the price of the package tour to $\$ 8,200$ to decrease the breakeven point in units. Using information in the original problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?

Lifetime Escapes generates average revenue of $\$ 7,500$ per person on its 5-day package tours to wildlife parks in Kenya. The variable costs per person are as follows: $$\begin{array}{lr}
\text { Airfare } & \$ 1,600 \\\text { Hotel accommodations } & 3,100 \\\text { Meals } & 600 \\\text { Ground transportation } & 300 \\\text { Park tickets and other costs } & 700 \\\text { Total } & \frac{11}{\$ 6,300}\end{array}$$ Annual fixed costs total $\$ 570,000$
1. Calculate the number of package tours that must be sold to break even.
2. Calculate the revenue needed to earn a target operating income of $\$ 102,000$.
3. If fixed costs increase by $\$ 19,000$, what decrease in variable cost per person must be achieved to maintain the breakeven point calculated in requirement $1 ?$
4. The general manager at Lifetime Escapes proposes to increase the price of the package tour to $\$ 8,200$ to decrease the breakeven point in units. Using information in the original problem, calculate the new breakeven point in units. What factors should the general manager consider before deciding to increase the price of the package tour?

Key Concepts

Pricing Strategy Considerations

Pricing strategy involves determining the optimal selling price for a product or service to maximize profit while considering market demand and competitive dynamics. When adjusting prices, it's important to evaluate how a change in price may affect the number of units sold, the company’s market position, and the overall profitability. This concept stresses the need for a balanced approach between covering costs and staying competitive.

Cost Structure Sensitivity

Cost structure sensitivity examines how changes in variable costs or fixed costs affect the break-even point and overall profitability. This concept is crucial when evaluating strategies to control costs and maintain financial stability, particularly in situations where cost reductions or increases are expected. It includes analyzing the impact of cost changes to determine the adjustments needed to sustain current performance.

Target Profit Analysis

This involves determining the sales volume or revenue required to achieve a predetermined level of profit. In target profit analysis, the desired profit is added to the total fixed costs, and then divided by the contribution margin per unit. This provides insight into how much revenue must be generated to meet specific financial objectives.

Break-Even Analysis

Break-even analysis is the process of determining the number of units or the revenue amount required to cover all fixed and variable costs. At the break-even point, total revenues equal total costs, meaning the company neither makes a profit nor incurs a loss. This analysis is fundamental for understanding the minimum sales volume necessary for the business to remain viable and for planning purposes.

Cost-Volume-Profit Analysis

This is a managerial accounting tool used to determine how changes in costs and volume affect a company's operating income and net income. It involves understanding and calculating the break-even point, analyzing the impact of selling a different number of units on profits, and evaluating what happens when costs change. It helps in making decisions related to pricing, production levels, and cost management.

Contribution Margin

The contribution margin represents the amount remaining from sales revenue after all variable costs have been subtracted. This margin is used to cover fixed costs and then contribute to profit once the break-even point is exceeded. Calculating the contribution margin per unit is essential for break-even analysis and for setting target profit goals.

Transcript

00:02 In the question it is given average revenue per person is $7 ,500 and variable cost per person is $6 ,300.

00:12 So we can easily find out contribution per person.

00:16 Contribution per person will be average revenue per person subtracted from its variable cost.

00:28 If we less this bigger, then we are going to get $1 ,200.

00:34 So this is the contribution for person.

00:39 Fixed cost is given as fixed cost annually it is 570 ,000 dollars 570 ,000 dollars so in the first question has asked break even point in units break even point in units so for its the formula is the formula will be fixed cost divided by contribution per person so we know that fixed cost is how much $570 ,000 dollars and contribution 4 % we have calculated that is $1 ,200 so if we solve this and we are going to get 475 packages so the company needs 475 packages at this 1 ,200 contribution level to reach its break -even point now in the second question the second question is asking revenue needed to earn a operating income of 102 dollar operating income to be earned is given as one hundred and two thousand dollar so we need to find out the revenue that needed to be earned so for it's the formula will be desired revenue or sales that is required to earn the operating income of one hundred and two dollar will be fixed cost plus operating income divided by pv ratio.

02:27 Now we can easily find out the pv ratio.

02:30 Pv ratio is contribution per unit that is $1 ,200 upon average revenue per person, $7 ,500 into 100.

02:43 This will give us 16%.

02:46 So the pv ratio is 16%.

02:48 So we will put the values in the formula, that is the fixed cost is for $570 ,000 and operating income needed to $2 ,000 .2%.

02:58 Is $102 ,000, $102 ,000 and the pv ratio is 16%.

03:07 So if we solve this, we are going to get 42002.

03:19 So we need the revenue of 4200 -3 -0 in order to earn operating income of 100...