Parasailing Company

Master of Business Administration, University of The People

BUS5110: Managerial Accounting

December 1, 2021
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The Contribution Margin (CM) is the difference between the selling price of the product and its

variable cost. What is meant by the contribution is the contribution of each product to cover the

fixed costs until it is covered in full, and it begins to appear (CFI, n.d.)

In order to calculate the Break-even point, we need to know the contribution margin first which

will be calculated as below (Walther, 2009)

Sales = Variable Cost + Fixed Cost

Contribution Margin = Sales Revenue – Variable Cost

Contribution Margin Ration = Contribution margin / Sales Revenue

The Flight Price = $175, Boat Crew fees = $30, Fuel Per Flight = $100

Contribution Margin = ($175 - (30+100)) = $45

Thus, the Contribution Margin Ration = $45 / $175 = 25.71%

Now after calculating the CM, we can determine the number of the flights:

The fixed cost = $350 (Loan Payment) + $2,500 (Scheduler Salary) + $500 (Dock Fee) =

$3,350/Month and that will be $40,200 per year

Year One

The number of flight per year will be = $40,200 / $45 = Approx. 893 flights and that will be the

number of flight which is required to break even for the year one, if we calculate this on monthly

basis, it will be 75 flight approximately, which means average of 2.45 flight on daily basis, so the

annual sales of the number of the flight will be $156,450

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Year Two

For the year two, if we add %2 for referral cost per flight, the number of the flight will be as

following:

Fixed cost will remind the same = $40,200 per year

CM per flight = ($175 – 130 + (175*2%)) = $41.5

Break Even Point will be = $42,200 / $41.5 = 969 flight approximately, so the annual sales of the

number of the flight will be $169,575

Year Three

In order to determine the number of flights needed to retain a profit of $10,000 in Year three, we

will assume that the company does allow for referrals, which we will consider 2% referral cost per

flight, and we will add $10,000 of the profit margin to our fixed cost $45,200 and that will be

calculated as following

Number of flights needed = ($10,000 + $45,200) / $42.5 = 1210 flight per year approx. so the

annual sales of the number of the flight will be $211,750

In case we consider without referrals, the calculation will be as following:

Break-even point without referrals = 894

The CM per flight = $45.00

Number of flights will be = ($100,000 / $45) = 222 and from that we can find the total of flights

required = 894 + 222 = 1,116 Flight

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Limitation of the data

After calculating the number of the flights for three years, despite of the data which we have given

which shows that the company is having profits, we can see that there is some missing data which

can make the calculation more accurate, the depreciation of the equipment for example and the

overhead cost in general, market research also was missed and that will affect accurately of the

numbers

In conclusion, it appears from the low level ranging of CM ration that the company have very low

cash amount to cover the loan, there is no guarantee that company will stay in profit with these

number, so I don’t advice the bank issue a loan to the company.

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References

Corporate Finance Institute (n.d) Contribution Margin. Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/accounting/contribution-margin-

overview/

Walther, L. M. & Skousen, C.J. (2009). Managerial and Cost Accounting.

https://library.ku.ac.ke/wp-content/downloads/2011/08/Bookboon/Accounting/managerial-and-

cost-accounting.pdf