Health Cruises Case
Health Cruises Case
Read the Health Cruises Case and submit answers to the following questions.
1. What is the minimum number of passengers Health Cruises must sign up by November 20th to break even? [show your calculations]
Considering that an average ticket price is $1500 and the cost per passenger is $200, each sold ticket generates $1,300 of the positive cash flow. Since $295,000 of the initial capital had been spent by November 14th, the following minimum number of passengers must sign up in order for Health Cruises to break even provided no more money is invested:
Minimum passengers to break even = $295,000 / $1,300 = 227.
2. Should Health Cruises go ahead with the cruise since 200 people have signed up by November 14th? Why or why not?
Health Cruises should go ahead with the cruise in any event. If the cruise is canceled, $295,000 of the already spent capital would become a total loss. Even if no more passengers sign up, the loss would be only $35,000, i.e. (200 * $1,300) - $295,000.
3. The advertising agency has proposed two alternative campaigns to help fill the boat. One will cost $6000 and the other would cost $15,000. Which would you suggest? [again, show your calculations].
If 20 additional passengers sign up and pay on average $1,500 as expected with the limited advertising campaign which cost $6,000, the net earnings (loss) of the cruise will be as followed:
EBIT = (220 * $1,300) - ($295,000 + $6,000) = -$15,000. (A loss of $15,000)
If 40 additional passengers sign up and pay on average $1,500 as expected with the more ambitious advertising campaign, the net earnings of the cruise will be as followed:
EBIT = (240 * $1300) - ($295,000 + $15,000) = $15,500. (A profit of $15,500)
To summarize, the ambitious advertising campaign is more beneficial for the Health Cruises’ bottom line than the limited advertising campaign.
4. Should Health Cruises consider cutting its prices for this trip?
Read the Health Cruises Case and submit answers to the following questions.
1. What is the minimum number of passengers Health Cruises must sign up by November 20th to break even? [show your calculations]
Considering that an average ticket price is $1500 and the cost per passenger is $200, each sold ticket generates $1,300 of the positive cash flow. Since $295,000 of the initial capital had been spent by November 14th, the following minimum number of passengers must sign up in order for Health Cruises to break even provided no more money is invested:
Minimum passengers to break even = $295,000 / $1,300 = 227.
2. Should Health Cruises go ahead with the cruise since 200 people have signed up by November 14th? Why or why not?
Health Cruises should go ahead with the cruise in any event. If the cruise is canceled, $295,000 of the already spent capital would become a total loss. Even if no more passengers sign up, the loss would be only $35,000, i.e. (200 * $1,300) - $295,000.
3. The advertising agency has proposed two alternative campaigns to help fill the boat. One will cost $6000 and the other would cost $15,000. Which would you suggest? [again, show your calculations].
If 20 additional passengers sign up and pay on average $1,500 as expected with the limited advertising campaign which cost $6,000, the net earnings (loss) of the cruise will be as followed:
EBIT = (220 * $1,300) - ($295,000 + $6,000) = -$15,000. (A loss of $15,000)
If 40 additional passengers sign up and pay on average $1,500 as expected with the more ambitious advertising campaign, the net earnings of the cruise will be as followed:
EBIT = (240 * $1300) - ($295,000 + $15,000) = $15,500. (A profit of $15,500)
To summarize, the ambitious advertising campaign is more beneficial for the Health Cruises’ bottom line than the limited advertising campaign.
4. Should Health Cruises consider cutting its prices for this trip?