Chapter 11, Problem 4MAD

a)

To determine

Ascertain the operating income from cruise for Company ACL.

Explanation of Solution

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.

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

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

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

Ascertain the contribution margin per passenger of Company ACL.

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

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

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:

(1) Calculate the Revenue from the proposed plan.

    $\begin{array}{c}\text{Revenue = }\left[\left(\left(\begin{array}{l}\text{Discount tickets on}\\ \text{early booking}\end{array}\right)\times \$4,500\right)\text{+}\left(\left(\begin{array}{l}\text{Remaining}\\ \text{tickets}\end{array}\right)\text{× \$6,000}\right)\right]\\ \text{ = }\left[\left(\text{300}\times \$4,500\right)\text{+}\left(\left(\text{1,180 }-\text{ 300}\right)\text{× \$6,000}\right)\right]\\ \text{ = }\left[\left(\$1,350,000\right)\text{+}\left(\text{880× \$6,000}\right)\right]\\ \text{ = \$1,350,000 + \$5,280,000}\\ \text{= \$6,630,000}\end{array}$

(2) Calculate the cost to serve the crew for the proposed plan.

    $\begin{array}{c}\text{Crew to serve = Number of passengers }\times \text{ Cost per passenger}\\ \text{ = }1,\text{180 × \$1,200}\\ \text{ = \$1,416,000}\end{array}$

(3) Calculate the cost of food for the proposed plan.

    $\begin{array}{c}\text{Food = Number of passengers }\times \text{ Cost per passenger}\\ \text{ = }1,\text{180 × \$1,500}\\ \text{ = \$1,770,000}\end{array}$

(4) Calculate the cost amenities and excursion for the proposed plan.

    $\begin{array}{c}\begin{array}{l}\text{Amenities and}\\ \text{Excursion}\end{array}\}\text{ = Number of passengers }\times \text{ Cost per passenger}\\ \text{ = }1,\text{180 × \$400}\\ \text{ = \$472,000}\end{array}$