Financial & Managerial Accounting
Financial & Managerial Accounting
14th Edition
ISBN: 9781337119207
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Question
Chapter 24, Problem 3ADM

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

Accept Special Offer: Usually the acceptance of special offers by the business aims at utilizing the unused capacity of a business, so that the costs get reduced (as fixed costs are neglected) and additional revenue is generated.

To Determine: The operating income from cruise for Company ACL.

a)

Expert Solution
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Explanation of Solution

Operating income: Operating income refers to the income generated from the operation of business, or the revenue generated from the services offered by the company.

Calculate the operating income from cruise for Company ACL.

Revenues $6,000,000
Expenses:  
Crew to serve passengers $2,700,000
Food $1,500,000
Amenity and excursion $400,000
Depreciation $120,000
Fuel $50,000
Total expense $4,770,000
Income from operations per cruise $1,230,000

Hence, the operating income from cruise for Company ACL is $1,230,000.

b)

To determine

The variable cost per passenger for each variable item of Company ACL.

b)

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Explanation of Solution

Variable cost: Variable cost refers to the costs

Calculate the variable cost per passenger for each variable item of Company ACL.

Variable cost Activity Cost (a) Number of Passengers (b) Variable Cost  per passenger (a ÷ b)
Crew to serve passengers $1,200,000 1000 $1,200
Food $1,500,000 1000 $1,500
Amenity and excursion $400,000 1000 $400
Total $3,100

Table (1)

Hence, the variable cost per passenger for the variable cost items is $3,100.

c)

To determine

The contribution margin per passenger of Company ACL.

c)

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Explanation of Solution

Contribution Margin: Contribution Margin refers to the margin of profit expected by the company. The contribution margin is the difference between the selling price and the cost of the product.

Calculate the contribution margin per passenger of Company ACL.

Ticket price $6,000
Expenses:  
Crew to serve passengers $1,200
Food $1,500
Amenity and excursion $400
Total variable cost per passenger $3,100
Contribution margin per passenger $2,900

Hence, the contribution margin per passenger of Company ACL is $2,900.

d)

To determine

To Prepare: The differential analysis of Company ACL for the existing plan and the proposed early booking plan.

d)

Expert Solution
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Explanation of Solution

Prepare the differential analysis of Company ACL, for given alternatives.

Differential Analysis
Existing Plan (Alt. 1) or Early Booking Program (Alt. 2)
  Existing Plan (Alternative 1) Early Booking Program (Alternative 2) Differential Effect on income
Revenues $6,000,000 (1)         $2,320,000 $630,000
Variable Costs per cruise      
Crew to serve passengers (-)  $1,200,000 (2)   (-)  $1,416,000 (-)  $216,000
Food (-)  $1,500,000 (3)   (-)  $1,770,000 (-)  $270,000
Amenity and excursion (-)  $400,000 (4)     (-)  $472,000 (-)  $72,000
Advertising $0 (-)  $15,000 (-)  $15,000
Total (-)  $3,100,000 (-)  $3,673,000 (-)  $573,000
Income (loss) $2,900,000 $2,957,000 $57,000

Table (2)

Hence, the proposed early booking plan should be accepted as it could generate an additional income of $57,000.

Working Note:

Calculate the Revenue from the proposed plan.

Revenue =  [((Discount tickets onearly booking)×$4,500)+((Remainingtickets)× $6,000)] =  [(300×$4,500)+((1,180  300)× $6,000)] =  [($1,350,000)+(880× $6,000)] =  $1,350,000 + $5,280,000=  $6,630,000 (1)

Calculate the cost to serve the crew for the proposed plan.

Crew to serve =  Number of passengers × Cost per passenger =  1,180 × $1,200 =  $1,416,000 (2)

Calculate the cost of food for the proposed plan.

Food =  Number of passengers × Cost per passenger =  1,180 × $1,500 =  $1,770,000 (3)

Calculate the cost amenities and excursion for the proposed plan.

Amenities andExcursion} =  Number of passengers × Cost per passenger =  1,180 × $400 =  $472,000 (4)

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Chapter 24 Solutions

Financial & Managerial Accounting

Ch. 24 - Lease or sell McFadden Company owns equipment with...Ch. 24 - Prob. 24.2BECh. 24 - Make or buy A company manufactures various-sized...Ch. 24 - Replace equipment A machine with a book value of...Ch. 24 - Process or sell Product J19 is produced for 11 per...Ch. 24 - Accept business at special price Product A is...Ch. 24 - Product cost markup percentage Green Thumb Garden...Ch. 24 - Prob. 24.8BECh. 24 - Differential analysis for a lease or sell decision...Ch. 24 - Prob. 24.2EXCh. 24 - Differential analysis for a discontinued product A...Ch. 24 - Differential analysis for a discontinued product...Ch. 24 - Prob. 24.5EXCh. 24 - Prob. 24.6EXCh. 24 - Make-or-buy decision Fremont Computer Company has...Ch. 24 - Make-or-buy decision for a service company The...Ch. 24 - Machine replacement decision A company is...Ch. 24 - Differential analysis for machine replacement Kim...Ch. 24 - Sell or process further Calgary Lumber Company...Ch. 24 - Sell or process further Rise N Shine Coffee...Ch. 24 - Decision on accepting additional business...Ch. 24 - Accepting business at a special price Portable...Ch. 24 - Prob. 24.15EXCh. 24 - Product cost method of product pricing La Femme...Ch. 24 - Product cost method of product costing Smart...Ch. 24 - Target costing Toyota Motor Corporation uses...Ch. 24 - Target costing Instant Image Inc. manufactures...Ch. 24 - Prob. 24.20EXCh. 24 - Product decisions under bottlenecked operations...Ch. 24 - Appendix Total cost method of product pricing...Ch. 24 - Appendix Variable cost method of product pricing...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Prob. 24.5APRCh. 24 - Product pricing and profit analysis with...Ch. 24 - Differential analysis involving opportunity costs...Ch. 24 - Differential analysis for machine replacement...Ch. 24 - Differential analysis for sales promotion proposal...Ch. 24 - Differential analysis for further processing The...Ch. 24 - Prob. 24.5BPRCh. 24 - Prob. 24.6BPRCh. 24 - Service yield pricing and differential analysis...Ch. 24 - Prob. 2ADMCh. 24 - Prob. 3ADMCh. 24 - Ethics in Action Aaron McKinney is a cost...Ch. 24 - Prob. 24.3TIF
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