1. What is the minimum number of passengers Health Cruises must sign up by November 20th to break even? [show your calculations]
Fixed Cost = 220000+10000+65000 = 295000
Variable cost per passenger = 200
Revenue = 1500 per passenger X # of passengers (# of passengers = x)
Revenue – Cost = Profit
1500x – (200x+295000) = 0
x = 226.92 rounded up to 227 passengers to break even
2. Should Health Cruises go ahead with the cruise since 200 people have signed up by November 14th?
IF the $220,000 boat rental is non-refundable, then there are only 2 options. Go ahead and do the trip anyway and hope more people buy tickets, or call the whole thing off. Calling the whole thing off will mean they spent $295,000 on nothing, whereas going ahead with this trip will incur a loss of only $35,000. Plus there is the additional chance that more will buy and lower the loss. Also, if the trip is enjoyed by the passengers, word of mouth will encourage future ticket purchases. I would say do the trip anyway and minimize losses. It wont cost anymore money to give it a shot.
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].
Fixed Cost = 220000+10000+65000+6000 = 301000
Variable cost per passenger = 200 (Total VC = 44000)
Revenue = 330000 = 1500 per passenger (# of passengers = 220)
330000-44000-301000 = (15000)
Fixed Cost = 220000+10000+65000+15000 = 310000
Variable cost per passenger = 200 (Total VC = 48000)
Revenue = 360000 = 1500 per passenger (# of passengers = 240)
360000-48000-310000 = 2000
I would suggest the use of the $15,000 plan because if it works, there will be a net income of $2,000. The $6000 plan still incurs a loss of $15,000, however it is substantially less then the loss without advertising, which is $35,000. Now the only hard part is...
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