BUS 5110:

Managerial Accounting
AY2021 -T4

Written Assignment Unit 3

Instructor: Dr. Angela Palmer

April 26th, 2021

You are the owner of a parasailing company that is expanding operations to a new
beachfront location, and you need to prepare a 3-year analysis for the bank that may loan
you the funds to purchase your boat and parasailing equipment. A lot of business is done on
a referral basis, where a company pays a fee to a 3rd party to send them
customers. However, because of your well-established reputation, you already have received
requests for “flights” to be scheduled as soon as you open the new location. Therefore, you
expect to break-even the first year but must calculate the number of flights needed. You also
need to determine the new break-even point in Year 2 if the location allows referrals, which
you believe will cost on average about 2% of the sales price overall. Finally, you need to
determine the volume needed to have $10,000 in profit in Year 3. The following information
is available:

• Sales price per flight $175

• Estimated loan payment per month $350
• Fuel costs per flight $100
• Full-time scheduler salary $2,500 per month
• Boat crew per flight $30
• $500 per month dock fee and use of a small office on a pier

• Calculate the Year 1 break-even quantity, contribution margin, and contribution

margin ratio. Explain how the values were determined.

Annual Fixed cost are (Loan Payment + Scheduler Salary + Dock fees ) times 12 months

= ($350 + $2,500 + $500) * 12

= $40,200

Contribution Margin per Flight = Sales price per Flight – Variable Cost per
Flight
= $175 – ($100 + $30)
= $45

Break-even quantity = Annual Fixed Cost / Contribution per Flight

= $40,200 / $45

= 893.3333

= around 893 Flights

If the company break-even during year 1, quantity sold will equals break-even
quantity that means there is no profit or loss during the year. That’s why:
Contribution Margin = Fixed Cost
= $40,200
 Contribution Margin Ratio = (Contribution per Flight / Sales price per Flight)*
100
= ($45 / $175) *100

= 25.71 %

• Calculate the Year 2 break-even quantity, break-even sales, and contribution

margin ratio. Explain how the values were determined.

Break-even quantity = Annual Fixed Cost / Contribution per Flight

= $40,200 / $41.5

= 968.6746

= around 968 Flights

Annual Fixed cost same as first part (i.e. $40,200)

Contribution per Flight = Sales price per Flight – Variable Cost per Flight
= $175 – {$100 + $30 + (175 * 2%)}
= $41.5
b. Break-even sales = Break-even quantity * Sales price per Flight
= 968 Flights * $175

= $169,400

c. Contribution Margin Ratio = (Contribution per Flight / Sales price per Flight)*
100
= ($41.5 / $175)* 100

= 23.71 %

• Determine the number of flights (units) needed to retain a profit of $10,000 in

Year 3, assuming the company does allow for referrals.

Determination of number of flights needed to retain profit of $10,000

No. of Flights needed = (Fixed Cost + Profit) / Contribution per flight
= ($40,200 + $10,000) / $45

=1115.5555

= around 1,115 Flights

• Recommend if the bank should issue the loan.

 The bank should approve a loan to this company due to low fixed cost unless
more Full-time scheduler are needed if more flights are booked

• Explain the relationship of the costs to the concept of contribution margin.

The contribution margin can be stated on a gross or per-unit basis. It represents the

incremental money generated for each product/unit sold after deducting the variable portion

of the firm's costs. The contribution margin is computed as the selling price per unit, minus

the variable cost per unit. Also known as dollar contribution per unit, the measure indicates

how a particular product contributes to the overall profit of the company. It provides one

way to show the profit potential of a particular product offered by a company and shows the

portion of sales that helps to cover the company's fixed costs. Any remaining revenue left

after covering fixed costs is the profit generated.

Reference:

LaMarco, N. (2018, August 29). What is a Contribution Margin Percent? Small Business -
Chron.com. https://smallbusiness.chron.com/contribution-margin-percent-17724.html.

Staff, I. (2020, December 22). Understanding Contribution Margins. Investopedia.

https://www.investopedia.com/terms/c/contributionmargin.asp.