Blueline Tours Inc. operates tours throughout the United States. A study has indicated that some...

Question:

Blueline Tours Inc. operates tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours to improve the company's overall operating performance. One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from a typical Historic Mansions tour is given below:

Ticket revenue (115 seat capacity x 40% occupancy x $65 ticket price per person) $      2,990 100%
Variable expenses ($18.00 per person)      828    27.7
                                                                                                                                                 _______ _____
Contribution margin      2,162 72.3%
====== ====
Tour expenses:
Tour promotion $         680
Salary of bus driver         360
Fee, tour guide         720
Fuel for bus         155
Depreciation of bus         540
Liability insurance, bus         300
Overnight parking fee, bus          60
Room and meals, bus driver and tour guide         180
Bus maintenance and preparation         240
Total tour expenses      3,235
_______
Net operating loss $    (1073)
======

The following additional information is available about the tour:
a. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
b. The "Bus maintenance and preparation" cost on the previous page is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition.
c. Depreciation of buses is due to obsolescence. Depreciation due to wear and tear is negligible.
d. Liability insurance premiums are based on the number of buses in the company's fleet.
e. Dropping the Historic Mansions bus tour would not allow Blueline Tours to reduce the number of buses in its fleet, the number of bus drivers on the payroll, or the size of the maintenance and preparation staff.

Required:

By how much will the profits increase or decrease if this tour is discontinued? (Enter the amount as a positive value.)

Profits would                                                   by           $                                                                            

Dropping a Service:

Using an income statement to decide on whether or not a product or a service must be dropped can be misleading because not all the costs allocated to is will be avoidable if it is discontinued.

Answer and Explanation:


Loss in tour contribution margin $(2,162)
Saving in avoidable tour expenses
Tour promotion 680
Salaries bus driver
unavoidable
$0
Fee, tour guide 720
Fuel for bus 155
Depreciation for bus
unavoidable
$0
Liability insurance
unavoidable
$0
Overnight parking fees \60
Rooms and meals, bus driver and tour guide 180
Bus maintenance and preparation
unavoidable
$0
Decrease in operating income if the tour is dropped $(367)

Learn more about this topic:

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Relevant Costs in Eliminating a Product or Segment

from Accounting 301: Applied Managerial Accounting

Chapter 9 / Lesson 12
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