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? Why or why not? What other factors could impact the go/no-go decision in addition to the break even?
Since even with the ambitious advertising complain there is a distinct possibility that the cruise will be short of its full capacity by 60 passengers, the cutting cruise prices may provide an increase in the profit beyond expected $15,500 (with the ambitious advertising campaign) due to more ticket sold. Assuming that it is possible to sign up additional 100 passengers if the ambitious advertising campaign also offers reduced ticket prices, we can calculate that the minimum average ticket price that that passengers should pay and still provide for the $15,500 profit:
MinTicketPrice = ($35,000 + $15,000 + $15,500) / 100 + $200 = $855,
where $35,000 is loss as November 14th, $15,000 is the advertising campaign cost, $15,500 is the minimum profit, and $200 is cost per passenger.
Ideally the cruise profit could be maximized by adjusting the ticket price in response to demand and supply. However, even if additional tickets are offered outright at an average price of $1,200 (a 20% discount) in order to generate enough demand to sell the remaining 100 tickets the cruise earnings can be calculated as follow:
EBIT = (200 * $1300) + (100 * $1000) - ($295,000 + $15,000) = $50,000.
Note that $200 cost for passenger is deducted from ticket prices in the above calculation.
The only risk with such a price reduction is that the reduced price would not be able to generate enough demand to sell all remaining 100 tickets. However, the cruise still would break even if 50 tickets are sold at an average price of $1,200 and the cruise profit would exceed the target $15,500 if more than 65 tickets are sold at this reduced price.
A 20% price reduction is just an example to drive the point. The Health Cruises management may have some marketing data to help to come with a more appropriate number.
It does not appear that there are any factors (even the break...