Marginal Analysis

docx

School

University of California, San Diego *

*We aren’t endorsed by this school

Course

103

Subject

Finance

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by MajorSheep3374

Questions What is the minimum number of passengers that Health Cruises must sign up by November 20 to break even with the cruise? (Show your calculations.) Fixed Costs: Ship rental and crew: $220,000 Initial advertising budget: $65,000 Other administrative expenses: $10,000 Total fixed costs: $295,000 Variable Cost per Passenger: $200 Selling Price per Passenger: $1,500 (average) Contribution Margin per Passenger=$1,500−$200=$1,300 Contribution Margin per Passenger=Selling Price per Passenger−Variable Cost per Passenger Break-even passengers= $295,000/ $1,300= 227 passengers Break-even passengers= Fixed costs/ Contribution Margin per passenger Should Health Cruises go ahead with the cruise, since 200 passengers had signed up as of November 14? Since the number of passengers needed to break even is 227, going ahead with 200 is a viable option since it's so close to covering its cost. It would be a bigger loss not to get the contribution from the 200 passengers. The contribution margin from all the current passengers is at $260,000 (200 * $1,300) which so far would cover all the ship rental and crew expenses, all the other administrative expenses, and almost half of the initial advertisement budget leaving a remaining of $35,000 in fixed costs to be covered. If they decided not to go ahead with the cruise the losses would be bigger. Would it be worthwhile for Health Cruises to spend either $6,000 or $15,000 for advertising on November 20? If so, which figure would you recommend? Campaign 1 ($6,000):

Cost: $6,000 Estimated Extra Passengers: 20 Contribution from Passengers: $1,300 * 20 = $26,000 Net Gain: $26,000 - $6,000 = $20,000 Campaign 2 ($15,000): Cost: $15,000 Estimated Additional Passengers: 40 Contribution from Passengers: $1,300 * 40 = $52,000 Net Gain: $52,000 - $15,000 = $37,000 With campaign 1 the company would be investing the money, but the total fixed cost would still not be covered since the net gain is $20,000 and the remaining fixed cost from the current 200 passengers to break even is $35,000. I think they should go for campaign 2 where the net gain is $37,000 allowing the company to break even a generate a small profit. How realistic are Carolyn Sukhan’s estimates of 20 more passengers for the $6,000 advertising campaign and 40 more passengers for the $15,000 campaign? I gave my advice to the previous question thinking they achieved their goal of new passengers per advertisement campaign. Nevertheless, in the first campaign, they were short 100 passengers meaning they only got 66% of the expected passengers or 2/3. If we take into consideration the same rate to measure performance in the new campaigns the first one would only get 13 to 14 passengers and the second one 26 to 27 new passengers. I think it's important to consider this since it's not completely realistic to assume this time they would attract the full amount of people predicted. Should Health Cruises consider cutting its prices for this maiden voyage health cruise? I think they could consider some different strategies, maybe offering their already signed-up passengers the most desirable stateroom at a lower price that would incentivize them to upgrade their ticket to make the contribution margin per passenger higher. If the contribution margin per passenger was $1,475 the

company would be breaking even which means that they only need each passenger to spend $175 more. *To get to this conclusion I divided the remaining fixed cost needing to be covered ($35,000) by the amount of passengers (200) which I added to the contribution margin per passenger. $35,000/200= $175

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version