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

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 (120 seat capacity x 40% occupancy x $60 ticket price per person) $2,880 100%
Variable expenses ($11.00 per person) 528 18.3
Contribution margin 2,352 81.7%
Tour expenses:
Tour promotion $690
Salary of bus driver 370
Fee, tour guide 710
Fuel for bus 175
Depreciation of bus 420
Liability insurance, bus 300
Overnight parking fee, bus 60
Room and meals, bus driver and tour guide 200
Bus maintenance and preparation 230
Total tour expenses 3,155
Net operating loss $(803)

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.

By how much will the profits increase or decrease if this tour is discontinued?

Relevant Costs in Eliminating a Product or Service:

The relevant costs used to calculate the increase or decrease in profits if a product or service is discontinued must be avoidable if it is eliminated. Examples of relevant costs usually include variable costs and traceable fixed costs.

Answer and Explanation:


Loss in tour contribution margin $(2,352)
Saving in avoidable tour expenses
Tour promotion $690
Salary of bus driver
unavoidable so irrelevant
0
Fee, tour guide 710
Fuel for bus 175
Depreciation of bus
unavoidable so irrelevant
0
Liability insurance, bus
unavoidable so irrelevant
0
Overnight parking fee, bus 60
Room and meals, bus driver and tour guide 200
Bus maintenance and preparation
unavoidable so irrelevant
0
Decrease in operating income if the tour is dropped $(517)

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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