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Written Assignment Unit 3
Parasailing Company Case Study
Student Name
Department of Business Administration, University of the People
BUS 5110-01 Managerial Accounting
Dr. Kathryn Denning
February 16, 2023
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As the owner of the Parasailing Company case study, a three-year analysis report is
prepared as below and will be submitted to the bank to qualify for a loan. The money will be
used to purchase boats and paragliding equipment for the new waterfront offices. The
majority of the company's revenue comes from referrals, and the company pays third parties
for each referral.
Analyzing the given values
Selling each flight costs $175, and this is considered the year's final sales price. Fuel
expenses for each flight are $100 and this is a variable cost that changes depending on how
many flights are sold. Boat crew salaries for each flight are $30 and this is a variable cost that
changes based on how many flights are sold. The parasailing company must pay $350 per
month for an estimated loan payment. However, the bank has not disclosed the total sum of
money requested. This makes the loan's cost pegged to a fixed price.
The facility costs associated with dock fees are $500 per month, which are considered
overhead and not variable costs. Planner salaries cost $2500 per full-time position, which is a
fixed cost. Some expenses don't vary based on business performance (Hayes, 2023); they're
simply paid regardless of specific operations. Some common examples of fixed costs are rent,
insurance payments, wages and loan repayments. Dispatcher salaries, dock fees and loans are
the same every month. This can be seen in the data analyzed in this case study. The
calculated costs are as follows:
Fixed costs per Year = (loan payment per month + dock fee per month + scheduler
salary per month) x 12 = ($350 + $500 + $2,500) x 12 = $40,200
Variable costs are business expenses that vary in proportion to the volume a business
produces or sells. Variable costs rise or fall depending on the firm’s output or sales volume –
rising as output increases and falling as output decreases (Kenton, 2022). Examples include
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maintenance, raw material costs, and packaging. The variable costs in the case study are $100
per flight for fuel and $30 per flight for crew. Then total variable cost = $100 + $30 = $130.
1st Requirement
The contribution margin is sales revenue less the variable costs (CFI Team, 2022).
Contribution margin per unit = selling price per unit – variable cost per unit = $175 –
$130 = $45
Contribution margin ratio = (selling price per unit – variable cost per unit) / selling
price per unit = contribution margin / sales price = 45 / 175 = 26%
Every dollar generated in sales contributes 26% to covering fixed costs and generating
revenue. Therefore, the break-even point (BEP) is calculated by dividing the fixed production
costs by the unit price minus the variable production costs. This is the level of production at
which production costs equal product revenue (Mitchell, 2022). Use the following formula:
Break-even quantity = Total fixed costs / (Sales price – variable cost) = Total fixed
costs / contribution margin = $40,200 / $45 = 893 flights
2nd Requirement
In year 2, the site allows referrals, which adds 2% of total sale price to variable costs.
The contribution margin ratio of year 2 = (Year 1 contribution ratio – referral fee) =
26% - 2% = 24%
Break-even sales Year 2 = Total fixed costs / contribution margin ratio of year 2 =
$40,200 / 24% = $167,500
Break-even sales quantity: $167,500 / $175 price of the flight = 957 flights x $175
3rd Requirement
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In order to maintain a $10,000 profit after three years, we need to plan out how many
flights we'll need to make. This can be accomplished through the following formulas:
Fixed cost + target = $40,200 + $10,000 = $50,200 = $50,200
Contribution margin for Year 3 will be represented in this formula:
Contribution margin = (cost of flight – variable cost) – (referral fee x cost of flight) =
$17 - $130 – 2% x $175 = $42
Target Profit (quantity) = Total fixed costs + Target profit/ (Sales price – variable cost)
= Total fixed costs + Target profit / contribution margin = $50,200 / $42 = 1,210 flights
per year.
4th Requirement
Bank officials must gather more information about the new location's activities. This
includes data about flight duration, weekend operations and daily capacity. If I were a bank
official, I would request this information from my client before signing any contracts.
Folding parasailing must run 9 flights per day in the first year and then 10 flights per day in
the second year. And finally, officials must operate 12 flights per day in the third year to
break even. Their bank can easily loan them money because they have proven that they can
earn a profit in the second year and increase it in the third. Because of their approach to
increasing the number of flights daily, they can earn lots of money quickly.
Conclusion
A company can use an equation based on contribution margin, contribution margin
percentage and a break-even point to calculate the expected profit of a new product. The
paper also explores how much sales revenue covers expenses and the portion that generates
revenue.
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References
CFI Team. (2022, November 30). Contribution Margin.
https://corporatefinanceinstitute.com/resources/accounting/contribution-margin-
overview/
Hayes A. (2023, January 17). Fixed Cost: What It Is and How It’s Used in Business.
https://www.investopedia.com/terms/f/fixedcost.asp
Kenton W. (2022, August 17). Variable Cost: What It Is and How to Calculate It.
https://www.investopedia.com/terms/v/variablecost.asp
Mitchell C. (2022, December 09). Breakeven Point: Definition, Examples, and How to
Calculate. https://www.investopedia.com/terms/b/breakevenpoint.asp
