Reference no: EM132571479

You are the owner of a parasailing company that is expanding operations to a new beachfront location, and you need to do 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:

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

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

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

Question 4: Recommend if the bank should issue the loan.