Blueline tours, Inc., operates tours throughout the United States
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 companys overall operating performance. One such tour is a two-day Historic Mansions bus tour conducted in the southern states. An income statement from typical Historic Mansions is listed below:
Ticket Revenue (100 seat capacity X 40% occupancy X
$75 ticket price per person)
Variable expenses ($22.50 per person)
. 2100 70%
Salary of bus driver
Fee tour guide
Fuel for Bus
Depreciation of bus
Liability insurance, bus
Overnight parking fee, bus
Room and meals, bus driver and tour guide
Bus maintenance and preparation
Total tour expenses
Net operating expenses
. $ (850)
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 above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the companys 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 companys 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.
1. Prepare an analysis showing what the impact will be on the companys profits if this tour is discontinued.
2. The companys tour director has been criticized because only about 50% of the seats on Bluelines tours are being filled as compared to an industry average seat occupancy could be improved considerably by eliminating about 10% of its tours, but that doing so would reduce profits. Explain how this could happen.