A Parasailing Company Case Study

Department of MBA, The University of the People

BUS 5110 - Managerial Accounting

Dr. Rebecca Attah

November 30, 2021

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A Parasailing Company Case Study

We start by classifying the income, variable, and fixed costs to tackle the problem and calculate
our annual costs. 
From the given information, we can find That the income is $175 per flight. The variable costs
per flight are $100 fuel per flight plus a $30 boat crew fee. The fixed costs per month are $350
loan payment plus $2500 scheduler salary plus $500 dock fee for a total of $3350. which overall
results in a monthly fee results in a fixed annual cost of $40,200.
Once we classify the line items, we can calculate the contribution margin, ratio, and break-even
point for year one.

Year 1:

Break-even quantity     = Total Fixed Cost / Contribution Margin per Unit

Break-even quantity     = Annual Fixed Cost / Contribution per Flight
= $40,200 / $45
= 893 Flights (Approx)
       Solving:
Annual Fixed Costs = (Loan Payment + Scheduler Salary + Dock fees) *12
                                               = ($350 + $2,500 + $500) * 12
                                               = $40,200
Contribution per Flight = Sales price per Flight – Variable Cost per Flight
                                               = $175 – ($100 + $30)
                                               = $45
Since the company expects break-even during year 1, quantity sold equals break-even quantity
that means there is no profit or loss during the year. That is why:

Contribution Margin     = Fixed Costs = $40,200

Contribution Margin Ratio = (Contribution per Flight / Sales price per Flight)* 100
      = ($45 / $175) *100
      = 25.71 %

By taking out the variable costs from the revenue, the flight price is $175 minus the variable
costs $30 boat crew fee and $100 fuel per flight result in a contribution margin of $45 per flight.
This contribution margin is just under the revenue by 25.71 %.
After we understand our contribution margins and monthly costs, we can calculate the number of
flights that we will need to break even in a year by dividing the annual fixed costs by the
contribution margin ( $42,000 divided by $45). Since we cannot make partial unit sales in this
business, we also need to round up the whole number to calculate the break-even cost without
risking debt. The flights' number required to break even is 893 flights. Monthly (with rounding)
means we would need to book 175 flights, or on average 2.45 flights per day. This number of
flights results in a required annual flight sales figure of $ 156,450.

Year 2:

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

= $40,200 / $41.5
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A Parasailing Company Case Study
= 969 Flights (Approx)
Solving:
Annual Fixed cost remains same as in year 1 (i.e. $40,200)
Contribution per Flight = Sales price per Flight – Variable Cost per Flight
                                               = $175 – {$100 + $30 + (175 * 2%)}
                                               = $41.5

Break-even sales            = Break-even quantity * Sales price per Flight

= 969 Flights * $175
= $169,575

Contribution Margin Ratio = (Contribution per Flight / Sales price per Flight)* 100
      = ($41.5 / $175)* 100
     = 23.71 %
Adding a 2% referral cost per flight equates to $3.50 per flight for a referral. Assuming it, the
contribution margin per flight becomes $41.50, which changes the annual flights' number to 969
for the break-even point. The flights' number results in a required annual flight sales figure of
$169,575.

Year 3:

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) / $41.5
                                             = 1,210 Flights (Approx)
In year three, assuming we still have a worst-case scenario of 2% referral cost per flight and
adding $10,000 of profit margin to the annual fixed costs of $40,200, our break-even point
becomes 1210 flights per year. 

Limitations of the Analysis

While the data shows that the pricing can be profitable, market research is still missing due to the
new location. Also, some costs would have made the case study more realistic, like maintenance,
boat spare parts, taxes. Besides, parasailing is a seasonal sport and no indications that insurance
or protection from liability in the event of injury has been taken into account.

Recommendation
from my point of view, I recommend the bank not to proceed with the loan due to high liability
and financial risks; despite the financial perspective and presenting a sensible contribution
margin, the liability is not accounted
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A Parasailing Company Case Study
References:

Accounting Hub. (n.d.). Accounting. Boundless.com CC BY-SA 4.0. Chapter 3 Retrieved from:

http://oer2go.org/mods/en-boundless/www.boundless.com/accounting/index.html

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Chapter 1.Retrieved from:

https://2012books.lardbucket.org/books/accounting-for-managers/s05-02-planning-and-control-
functions.html