3-year analysis of a parasailing company

Managerial Accounting
BUS 5110

Unit 3 Written Assignment

Term 2, 2022

University of the People

November, 2021
Introduction:

The contribution margin is computed by subtracting the variable costs, both product and non-manufacturing,

of a business from its sales revenue (Heisinger & Hoyle, n.d.). The value achieved is what should be

expected to cover fixed costs and contribute to profit. Variable costs are costs that vary in total based on the

volume of sales while fixed costs are those that do not change with change in volume of sales (Gallo, 2017)

Calculation of data for year1:

To solve the parasailing company case, we should categorize the income, variable costs, and fixed costs and

calculate the annual costs. The income is $175 per flight. Variable costs per flight are $100 in fuel per flight

and a $30 boat crew fee. The fixed costs are monthly and include a $350 loan payment, $2500 scheduler

salary and $500 dock fee for a total of $3350. This monthly fee results in a fixed annual cost of $40,200.

Annual fixed costs = (Loan payment+dock fee+scheduler salary)* 12 months

= (350+500+2500)*12 = $ 40,200

Contribution margin can now be calculated by subtracting the variable costs from the revenue (Walther &

Skousen, 2009, p. 50).The contribution margin per flight comes to around $45 after subtracting variable

costs of fuel cost and boat crew fee from the flight price.

Contribution margin per flight = Price per flight- variable cost per flight

= 175-(30+100)= $ 45
Now the number of breakeven flights can be calculated. It is the number at which the company just sustains

itself, i.e., without profit or loss. This can be calculated by dividing the annual costs by the contribution

margin.

Break-even quantity = fixed cost/contribution margin = 40200/45=893.33.

Since we can’t do partial unit sales in this business, we also need to round up to the next whole number to

calculate the breakeven cost without risking debt. So, the break-even number in this case should be 894

flights.

Contribution margin ratio = contribution margin/price per flight= 45/175 = 0.2571

Calculation of data for year2:

If we add a 2% referral cost per flight, that equates to $3.50 per flight for a referral.

While it’s not realistic to assume that every flight is a referral, it is the worst-case forecasting scenario. If we

assume the worst-case cost scenario, the contribution margin per flight becomes $41.50.

Contribution margin per flight = Price per flight- variable cost per flight

= 175-(30+100+2% of 175)= $ 41.5

New break-even number of flights =fixed cost/contribution margin = 40200/41.5 =968.67

Again rounding off to higher integer, we need 969 flights to breakeven.

 Contribution margin ratio = contribution margin/price per flight= 41.5/175 = 0.2371

Calculation of data for year3:

Since we continue to have 2% referral scheme for the 3rd year also, the contribution margin would be the

same as calculated for the second year.

Contribution margin per flight = Price per flight- variable cost per flight

= 175-(30+100+2% of 175)= $ 41.5

Since, we need to retain a profit of $10,000, we can calculate the number of flights to be taken as:

Flights to be taken = (fixed cost+ required profit)/ contribution margin

= 40,200+10,000/41.5=1209.63

Rounding off to the highest integer, we need 1210 flights to be taken to retain the required profit.

Loan issuance:

Based solely on the contribution margin and contribution margin percentage figures, bank should not have a

problem granting a loan as the company shows promise. But, digging deeper, since the risks associated with

the company like depreciation, insurance and competition are not considered, bank may ask for additional

information to process the grant of loan.

References:

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

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

accounting.pdf

Gallo, A. (2017). Contribution Margin: What It Is, How to Calculate It, and Why You Need It. Harvard

Business Review. Retrieved 27 November 2021, from https://hbr.org/2017/10/contribution-margin-

what-it-is-how-to-calculate-it-and-why-you-need-it.

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for

Managers. https://2012books.lardbucket.org/books/accounting-for-managers/index.html