Reference no: EM132797384

Joe, a fisherman, lives in a coastal village which has recently become a favourite with tourists. He is considering giving up fishing and converting his boat to take tourists on coastal tours. Each tour will last approximately 45 minutes. He is aware of the uncertain nature of the tourism business and is concerned that he may not have enough clients in years with poor weather, to break even.

Based on information obtained from similar tour providers, Joe estimates that the following data will apply to this business:

1. The average number of tourists taken on trips in a year is 15,000.
2. The average total costs incurred in a year when 10,000 tourists were taken on trips was R450,000.
3. The average total costs incurred in a year when 25,000 tourists were taken on trips was R675,000.
Fee per tourist is R40.

Required:

Problem i. Calculate the breakeven point (number of tourists) and margin of safety (using the average number of tourists taken); (10)

Problem ii. In an average year, Joe makes a profit of R60,000 from fishing. How many tourists would Joe need to take on trips in order to make the same profit?

Problem iii. Comment on your calculations in (i) and (ii) from the point of view of margin of safety.