. Jason Wu operates Exclusive Limousines, a fleet of 10 lim- ousines used for weddings, proms, and business events in Washington, D.C. Wu charges customers a flat fee of $250 per car taken on contract plus an hourly fee of $80. His income statement for May follows: $150,000 Revenue (200 contracts x $250) + (1,250 hours x $80) Operating expenses: Driver wages and benefits ($35 per hour x 1,250 hours) Depreciation on limousines Fuel costs ($12.80 per hour x 1,250 hours) 43,750 19,000 16,000 Maintenance 18,400 Liability and casualty insurance Advertising Administrative expenses 2,500 10,500 24,200 Total expenses Operating income 134,350 $ 15,650 All expenses are fixed, with the exception of driver wages and benefits and fuel costs, which are both variable per hour. During May, the company's limousines were fully booked. In June, Wu expects that Exclusive Limousines will be operating near capacity. Shelly Worthington, a prominent Washington socialite, has asked Wu to bid on a large charity event she is hosting in late June. The limousine company she had hired has canceled at the last minute, and she needs the service of five limousines for four hours each. She will only hire Exclusive Limousines if they take the entire job. Wu checks his schedule and finds that he only has three limousines available that day.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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If Wu accepts the contract with Worthington, he would either have to (a) cancel two prom contracts each for one car for six hours or (b) cancel one business event for three cars contracted for two hours each. What are the relevant opportunity costs of accepting the Worthington contract in each case? Which contract should he cancel?

. Jason Wu operates Exclusive Limousines, a fleet of 10 lim-
ousines used for weddings, proms, and business events in Washington, D.C. Wu charges customers a flat
fee of $250 per car taken on contract plus an hourly fee of $80. His income statement for May follows:
$150,000
Revenue (200 contracts x $250) + (1,250 hours x $80)
Operating expenses:
Driver wages and benefits ($35 per hour x 1,250 hours)
Depreciation on limousines
Fuel costs ($12.80 per hour x 1,250 hours)
43,750
19,000
16,000
Maintenance
18,400
Liability and casualty insurance
Advertising
Administrative expenses
2,500
10,500
24,200
Total expenses
Operating income
134,350
$ 15,650
All expenses are fixed, with the exception of driver wages and benefits and fuel costs, which are both variable per
hour. During May, the company's limousines were fully booked. In June, Wu expects that Exclusive Limousines
will be operating near capacity. Shelly Worthington, a prominent Washington socialite, has asked Wu to bid on
a large charity event she is hosting in late June. The limousine company she had hired has canceled at the last
minute, and she needs the service of five limousines for four hours each. She will only hire Exclusive Limousines
if they take the entire job. Wu checks his schedule and finds that he only has three limousines available that day.

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