Written Assignment Unit 3

BUS 5110 Managerial Accounting

Term 2

Submitted To: The University of the People

November 2021

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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 a pier

Requirements:

Calculate the Year 1 break-even quantity, contribution margin, 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.

SOLUTIONS

Definition of terms
N. B ( All terms definitions and formulas has their source from, Walther & Skousen 2009).

Contribution Margin: The contribution margin is revenues minus variable expenses.

Break-even results when: Sales = Total Variable Costs + Total Fixed Costs

Breakeven Quantity = Fixed Costs / (Sales Price Per Unit - Variable Cost Per Unit)

YEAR 1 CALCULATION

Calculate the Year 1 break-even quantity, contribution margin, and contribution margin ratio. Explain
how the values were determined.

Parameters given

 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 a pier

Total fixed cost in a year = 12 × ( Estimated loan payment per month + Full time scheduler
salary per month + dock fee and use of small office on a pier per month) = $12 ×(2500 + 500) =
$12 ×(3350) = $40,200

Total variable cost = Fuel cost per flight + Boat crew per flight = $(100 +30) = $130

Contribution margin per flight = Sales price per flight - ( Total variable cost per flight) = $175
– $(100 +30) = $175 - $130 = $45

Break-Even Point in Units = Total Fixed Costs / Contribution Margin Per Unit = 40200/45 =
893.33 Units Approximately 893

Contribution Ratio = Contribution margin per flight/ Sales price per flight 45/175 = 0.2571 i.e.
25.71%

YEAR 2 CALCULATION

Calculate the Year 2 break-even quantity, break-even sales, and contribution margin ratio.
Explain how the values were determined.

Parameters given

Sales price per flight $175.00

Referral of 2% of total sales price per flight = 2% of $175 = $3.50

Fuel costs per flight $100

Boat crew per flight $30

Total variable cost for year 2 = Referral per price flight + Fuel costs per flight + Boat crew per
flight = 3.50 + 100 + 30 = $133.50

New contribution margin = Sales price per flight – Total variable cost = 175- 133.50 = $41.50

Contribution Ratio = Contribution margin per flight/ Sales price per flight 41.5/175 =0.2371

Break even point in unit flight = Total Fixed Costs / Contribution Margin Per Unit =
40200/41.50 = 968.67 Units but on an approximate level since normal of flights can't take
decimal it will be 969 flights

Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio = 40200/0.2371 =
$169,548.71

YEAR 3 CALCULATIONS

Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3, assuming
the company does allow for referrals.

To arrive at targeted profit (income) of $10,000:

Sales = Total Variable Costs + Total Fixed Costs + Target Income

(Flights Units * Sales price per flight) = Flights Units * Total variable cost + Total fixed cost +
Target income

Units * 175 = Units × 133.5 + $40200 +$10000

175 units – 133.5 units = $40200 + $10000

41.5 Units = $51200

Flight units = 51200/41.5

The needed flights is about 1233.73 approximately 1234 flights

All things been equal what i felt is missing is parameters that will show what it will take to be
able to make the required numbers of flights to breakeven and even maximize profit

In my own view the business can thrive with the number even though the contribution margin
seems a bit low but it is still well to make the needed number of flights needed to generate good
income as such the bank should give out the loan.
References

Walther, L. M. & Skousen, C.J. (2009). Managerial and cost accounting. bookboon.com.
https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-and-
cost-accounting.