MBA 6035

Fall 2021
Johnson’s Boat Company
Tom Johnson is contemplating the introduction of boat services between Tiddleycove and Nicholas
Island. Tom can rent boats on a monthly basis at $2,200 per boat per month. Each boat has a
capacity of 70 passengers, and can make 6 one-way trips per day, 30 days a month. Tom decides on
a fare of $5 per one-way trip.
Tom has estimated the following costs:

Ticket processing $0.40 per passenger

Taxes $0.60 per passenger
Gasoline $100.00 per one-way trip
Crew salaries $ 70.00 per one-way trip
Boat cleaning $ 20.00 per one-way trip

Shore costs vary with the number of boats in the following manner:

Number of boats Total Shore Costs

1 boat $11,000 per month
2 boats $13,500 per month
3 boats $14,200 per month
4 boats $16,000 per month

Tom recognizes that the daily demand for his services is uncertain, but that demand and
frequency of service are interrelated. Table I below describes expected demand given various
frequencies of service.

Table I
Number of one-way trips per day Expected passengers per one-way trip
1-6 one-way trips 70 passengers
7-12 one-way trips 66 passengers
13-16 one way trips 63 passengers
17-20 one way trips 58 passengers
21-24 one way trips 52 passengers
Questions:

The ultimate goal of this exercise is to determine how many boats Tom should rent and how many
one-way trips per day he should operate. However, I want you to approach these decisions in a
systematic way so that your analysis not only yields the correct decisions but it also provides useful
insights into the economics of Tom’s business. Towards this end, you must use the concepts
contained in the cost-volume-profit model. The use of spread sheets and a mechanical enumeration
and evaluation of all feasible choices will be severely penalized.

Answer each of the following questions in the order asked. This order will lead you to the final
decisions to be made and will also give you insights into the economics of Tom’s business:

1) Present an organization of the firm’s cost structure in terms of the critical activities that
drive Tom’s costs. Use this cost structure to answer all subsequent questions.

2) What is the contribution margin per passenger? What are the contribution margins per
one-way trip for each of the trip frequencies described in Table I?

3) Suppose Tom has rented 1 boat per month. How many one-way trips per day should he
operate? Repeat this exercise for 2 boats, 3 boats and 4 boats.

4) How many boats should Tom rent?

5) Use break even analysis to provide Tom with insights into how the risk associated with a 2
boat business compares to the risk associated with a 3 boat business.