Chapter 11, Problem 11.47P

Dropping a product line, selling more tours. Nelson River Tours, a division of Old World Travel, offers two types of guided fishing tours, Beginner and Advanced. Operating income for each tour type in 2017 is as follows:

	Beginner	Advanced
Revenues (1,000 × $900; 800 × $1,650)	$900,000	$1,320,000
Operating costs
Administrative salaries	240,000	200,000
Guide wages	260,000	760,000
Supplies	100,000	200,000
Depreciation of equipment	50,000	120,000
Vehicle fuel	60,000	48,000
Allocated corporate overhead	90,000	132,000
Total operating costs	800,000	1,460,000
Operating income (loss)	$100,000	$ (140,000)

The equipment has a zero disposal value. Guide wages, supplies, and vehicle fuel are variable costs with respect to the number of tours. Administrative salaries are fixed costs with respect to the number of tours. Dennis Baldwin, Nelson River Tours’ president, is concerned about the losses incurred on the Advanced tours. He is considering dropping the Advanced tour and offering only the Beginner tour.

1. 1. If the Advanced tours are discontinued, one administrative position could be eliminated, saving the company $100,000. Assuming no change in the sales of Beginner tours, what effect would dropping the Advanced tour have on the company’s operating income?

Required

1. 2. Refer back to the original data. If Nelson River Tours drops the Advanced tours, Baldwin estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $100,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Baldwin drop the Advanced tour? Explain.
2. 3. What additional factors should Baldwin consider before dropping the Advanced tours?