Sea Vista Company operates tour boats. Its predicted operations for the year are as follows:
|Revenues (2,000 tours per year)||$600,000|
|Variable||$200 per tour|
|Fixed||$120,000 per year|
From the above information, the company correctly determines that its total cost per tour at the projected level of output noted above is as follows:
|Total variable costs ($200 x 2,000)||$400,000|
|Total Fixed costs||$120,000|
|Divided by the number of tours for the year||2,000|
|= Total cost per tour||$260|
The company has received a request to provide 90 tours at a price of $205 each, which constitutes a very large discount from their regular price. Sea Vista has plenty of capacity to do these tours in addition to its regular business, and it has been determined that doing these tours will not affect the company’s regular sales in any way.
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A. Prepare an income statement (in contribution margin format) for Sea Vista for the year without the inclusion of the special request for the 90 tours at the lower price.
B. Prepare an income statement (in contribution margin format) for Sea Vista for the year that includes the special request for the 90 tours at the lower price.
C. Should Sea Vista accept the special request for the additional 90 tours at the dramatically discounted price that is actually below their total cost per tour?