Written Assignment Unit 3

Submit a paper which is 2-3 pages in length (no more than 4-pages), exclusive of the reference
page. The paper should be double spaced in Times New Roman (or its equivalent) font which is
no greater than 12 points in size. The paper should cite at least three sources in APA format.
One source can be your textbook.
In this paper, please discuss the following case study. In doing so, explain your approach to the
problem, support your approach with references, and execute your approach. Provide an answer
to the case study’s question with a recommendation.
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

Requirements:

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

margin ratio. Explain how the values were determined.
 Calculate the Year 2 break-even quantity, break-even sales, and contribution margin
ratio. Explain how the values were determined.
 Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3,
assuming the company does allow for referrals.
 Recommend if the bank should issue the loan.

Superior papers will:

 Perform all calculations correctly.

 Articulate the approach to solving the problem.
 Explain the relationship of the costs to the concept of contribution margin.
 Discuss any limitations of the data, including what may be missing.
 Conclude on whether the bank should issue the loan.

Be sure to use APA formatting in your paper.  Purdue University’s Online Writing LAB (OWL) is a
free website that provides excellent information and resources for understanding and using the
APA format and style. The OWL website can be accessed
here: http://owl.english.purdue.edu/owl/resource/560/01/
Dear Dr. Amoah and peers,
I am attaching my paper for your review. 
Thank you

COST ANALYSIS OF A PARASAILING COMPANY

The break-even point is the production level where total revenues equals total expenses.

(Srinivasan & Mubashar, 2021). This is determined by dividing the total fixed cost of

production by the revenue per individual unit minus the variable cost per unit. (Mitchell,

2021). Furthermore, break-even quantity refers to how many units are required to cover all

costs, while break-even revenue refers to how much is needed to cover its expenses. (Basu,

2016)..

Before analyzing the break-even, we first must determine the cost structure as follows:

1. Variable Cost :
1.1. Fuel cost per flight : $100
1.2. Boat crew per flight : $ 30
Total VC : $130

2. Fixed Cost
2.1. Full-time scheduler salary ($2,500 per month) : $30,000
2.2. Dock fee and small office on a pier ($500 per month) : $ 6,000
2.3. Estimated loan payment per month $350 : $. 4,200
Total FC : $40,200

After that, simply make the following calculation:

 Calculation of the Year 1 break-even quantity, contribution margin, and

contribution margin ratio.

Contribution Margin = Selling price per flight - variable cost

 = $175 - $130

= $45

Contribution Margin Ratio = Contribution Margin / Selling price per flight

= $45 / $175

= 25.7%

As Walther & Skousen (2009) exemplifies, Break-even results when:

Sales = Total Variable Costs + Total Fixed Costs

For Parasailing Company, the math turns out this way:

(Flights x $175) = (Flights x $130) + $40,200

(Flights x $175) - (Flights x $130) = $40,200
(Flights x $45) = $40,200
Flights = 893,33  893

This implies 893 flights are required to cover all costs in the first year in order to break-even.
( 74 flights per month).

 Calculation of the Year 2 break-even quantity, break-even sales, and contribution

margin ratio. Explain how the values were determined.

Note: Referrals is 2% of Sales Price

Total Variable Cost = $130 + (0.02x$175)

= $130 + $3.5

= $133.5

Contribution Margin = Selling price per flight - variable cost

= $175 - $133.5

= $41.5

Contribution Margin Ratio = Contribution Margin / Selling price per flight

= $41.5 / $175

= 23.7%

Break-Event Sales = Total Fixed Cost / Contribution Ratio

= $40,200 / 23.7%
 = $169,620

Break-Event Quantity = Break Event Sales / Sales Price per unit

= $169,620 / $175

= 969.26  969

This implies a break-even for year 2 requires 969 flights and $169,620 in sales.

 Determine the number of flights (units) needed to retain a profit of $10,000 in Year
3, assuming the company does allow for referrals.

As Walther & Skousen (2009) exemplifies, Target Income results when:

Sales = Total Variable Costs + Total Fixed Costs + Target Income

Parasailing Company wants to know the level of sales to reach a $10,000 income:

(Flights x $175) = (Flights x $133.5) + $40,200 + $10,000

(Flight x $41,5) = $50,200
Flights = 1,209.63  1,210

Therefore, it takes 1,210 flights to make a profit of $10,000 in Year 3.

 Conclusion on whether the bank should issue the loan.

By knowing and understanding the Contribution Margin, the Bank can decide whether a
business or company is operating efficiently and effectively.

Because this company has a well-established reputation. I still recommend getting a loan
even though the contribution margin ratio is below 50%. Their reputation suggests they can
drive sales volume to be able to meet its fixed costs and make a profit.

Bank management can take a closer look at the company's financial statements during the
first beachfront location to ensure that they are indeed capable of achieving the BE-sales and
BE-quantities promised.

References :

Basu, C. (2016, October 26). Break-even Quantity & Revenue. Small Business - Chron.com.
https://smallbusiness.chron.com/breakeven-quantity-revenue-34003.html.
Mitchell, C. (2021, April 20). Breakeven Point (BEP). Investopedia.
https://www.investopedia.com/terms/b/breakevenpoint.asp.

Srinivasan, B., & Mubashar, N. (2021, March 22). Break Even Point. eFinanceManagement.
https://efinancemanagement.com/costing-terms/break-even-point.

Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Ventus
Publishing ApS. https://library.ku.ac.ke/wp-
content/downloads/2011/08/Bookboon/Accounting/managerial-and-cost-
accounting.pdf.