Grear Rafting Analysis

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Grear Rafting Company is the dream business of Ms. Grear, and has been in operation for one year, and according to the income statement she has provided, she is losing money. Because of her dream to maintain this rafting business, she has come to us for help to get her out of the red. In order to do this, we need to explain variable and fixed costs, period and product costs, and rewrite Grear Rafting’s income statement. Grear Rafting’s income statements is provided below.

Grear Rafting Company
Income Statement
For the Year Ended December 31, 2008

Revenue $1,048,000 Rental Cost of Rafts and Camping Equipment (208,600) Meals Provided to Rafters (314,400) Advertising Expenses (50,000) Compensation Paid to Guides (471,600) Salary of Office Manager (16,500) T-shirts and Hats Provided to Rafters (31,440) Office Utility Expense (3,850) Net Income (Loss) $(48,390)

(During the year, 1,048 rafters were served.)
(HBU, 2010)

Variable Costs
The book definition of variable costs is costs that, in total, vary in direct proportion to changes in output. In other words, the total increases as output increases and the total decreases as output decreases (Mowen, 2009, p.72). For example, a hot dog stand’s variable cost for hot dogs would increase with sales, because he sold more hot dogs, and the variable cost would decrease, because he sold less hot dogs. With this in mind, the costs that are dependent upon the number of rafters would be the meals provided, the compensation paid to the guides, and the t-shirts and hats provided. Next, we need to define the fixed costs. Fixed Costs

Again, the book definition of fixed costs is costs that, in total, are constant (Mowen, 2009, p.69). For example, a storage warehouse owner has a lease of $1000 per month on his building. Regardless of the number of customers he has, the warehouse owner must still pay the $1000 lease every month. Understanding the idea of a fixed cost, Ms. Grear’s fixed costs, relative to the number of rafters, are the rental cost of rafts and equipment. Period and Product Costs

Period costs are those costs that are not related to the provision of a service (Mowen, 2009, p.35). According to the provided income statement, Ms. Grear’s period costs are the advertising expenses, compensation to guides, salary paid to office manager, and the office utility expense.

Product Costs are those costs that are directly related to the manufacture of a product or, in this case, the provision of a service (Mowen, 2009, p.33). Ms. Grear’s product costs are the rental cost of rafts, the meals provided to rafters, and the t shirts and hats provided to rafters.

With the variable and fixed costs identified, we can now provide a new Contribution Margin Income Statement for Grear Rafting: Grear Rafting Company
Income Statement
For the Year Ended December 31, 2008

Sales (Revenue)$1,048,000
Less: Variable Expenses
Meals Provided to Rafters$314,400
Compensation Paid to Guides 471,600
T-Shirt and Hats Provided to Rafters 31,440
Total Variable Expenses
Contribution Margin$230,560
Less: Fixed Expenses
Rental Cost of Rafts and Camping Equipment208,600
Advertising Expenses50,000
Salary of Office Manager16,500
Office Utility Expenses3,850
Total Fixed Costs
Operating Income (Net Loss)-$48,390

As you can see from this income...
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