Grear Rafting Company, owned by Peggy Grear is a company that provides rafting services to rafters. Grear Rafting Company, henceforth referred to as Grear Rafting, has just gone through its first season in business on which it provided rafting services to 1,048 rafters for seven (7) days. During these seven (7) days, Grear Rafting also provided meals to the rafters three times a day, it also provides the rafts used during the season. During its first season, however, Grear Rafting experienced a loss. Peggy Grear has enough savings to get Grear Rafting through another season or two of business, but Grear Rafting would have to shut its business down if it does not make a profit (Houston Baptist University, 2012). In this paper, I would show what Grear Rafting requires to break-even and make a profit. Grear Rafting’s income statement from its first season is shown below on Table 1. Table 1.Grear Rafting CompanyIncome StatementYear Ended December 31, 2012| Revenue | | $1,048,000| Rental Expense| (208,600)| |
Meals Expense| (314,400)| |
Advertising Expense| (50,000)| |
Compensation to Guides| (471,600)| |
Salary Expense| (16,500)| |
T-shirts and Hats Expense| (31,440)| |
Office Utility Expense| (3,850)| |
Gross Income (Loss)| | $(48,390)|
Variable and Fixed Costs
There are different types of costs associated with the running of Grear Rafting. In order to develop a plan for Grear Rafting to make a profit, it is necessary to identify those costs that can be changed, and those that cannot be changed. 1. Variable Cost:
A variable cost is a cost that increases in total as output increases and decreases in total as output decreases. (Rich et al, 2010). For example, cotton used in making cotton shirts is a variable cost. As a company makes more cotton shirts, it needs more cotton to produce the shirts. The variable costs incurred by Grear Rafting are: * Meals provided to rafters ($314,400): the rafting trip is for seven (7) days, so as more rafters use Grear Rafting’s services, Grear Rafting would incur more costs in providing meals to the rafters for the time period of seven (7) days. If less rafters use Grear Rafting, the cost of providing meals would decrease. * Compensation paid to guides ($471,600): the compensation paid to the guides is paid on commission basis. Therefore, if more rafters use Grear Rafting’s services, the commission to the guides would increase, causing the compensation cost to increase as well, and if less rafters use Grear Rafting’s services, the compensation cost would also decrease. * T-shirts and hats provided to rafters ($31,440): the number of rafters that used Grear Rafting this season was 1,048. This incurred the cost of t-shirts and hats of $31,440. If more rafters come in the next season, the cost of providing t-shirts and hats would also increase. So also, if fewer rafters come in the next season, the cost of providing t-shirts and hats would decrease.
2. Fixed Cost:
A fixed cost is a cost that does not increase as total output increases and does not decrease as total output decreases. For example, the cost of property taxes on a factory stays the same no matter how much the factory produces. The quantity produced does not have an effect on the cost of property taxes; they only change because the city or county government raises taxes (Rich et al, 2010). Fixed costs incurred by Grear Rafting in its first season include: * Rental cost of rafts and camping equipment ($208,600): the rafts and equipment are rented on an annual basis, and additional rafts and equipment are not available to Grear Rafting. Since the rafts and equipment are rented annually, the number of rafters does not affect the cost of the rafts and equipment because these are rented not based on the number of rafters expected, but based on what is...