Classic Limo, Inc., provides limousine service to Tri-Cities airport. The price of the service is fixed at a flat rate for each trip and most costs of providing service are stable for each trip. Marc Pence, the owner, budgets income by estimating two factors that fluctuate with the economy: the fuel cost associated with each trip and the number of customers who will take trips. Looking at next year, Marc develops the following estimates of contribution margin (price less variable cost of the trip, including fuel) and for the estimated number of customers. Although Marc understands that it is not strictly true, he assumes that the cost of fuel and the number of customers are independent. Contribution Margin per Ride Scenario (Price – Variable cost) Number of Customers Excellent $55 4,800 Fair 25 3,500 Poor 20 2,200 In addition to the costs of a ride, Marc estimates that other service costs are $41,000 plus $5 for each customer (ride) in excess of 3,500 rides. Annual administrative and marketing costs are estimated to be $23,000 plus 10 percent of the contribution margin. Required: Prepare an analysis of the possible operating income for Classic Limo, Inc., similar to that in Exhibit 13.15. What is the range of possible operating incomes? Contribution Margin Number of Customers Total Contribution Margin Service Costs Marketing & Admin Operating Profit (Loss) Poor $20 2,200 Fair $25 2,200 Excellent $55 2,200 Poor $20 3,500 Fair $25 3,500 Excellent $55 3,500 Poor $20 4,800 Fair $25 4,800 Excellent $55 4,800
Classic Limo, Inc., provides limousine service to Tri-Cities airport. The price of the service is fixed at a flat rate for each trip and most costs of providing service are stable for each trip. Marc Pence, the owner, budgets income by estimating two factors that fluctuate with the economy: the fuel cost associated with each trip and the number of customers who will take trips. Looking at next year, Marc develops the following estimates of contribution margin (price less variable cost of the trip, including fuel) and for the estimated number of customers. Although Marc understands that it is not strictly true, he assumes that the cost of fuel and the number of customers are independent.
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Contribution Margin per Ride |
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Scenario |
(Price – Variable cost) |
Number of Customers |
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Excellent |
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$55 |
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4,800 |
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Fair |
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25 |
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3,500 |
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Poor |
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20 |
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2,200 |
In addition to the costs of a ride, Marc estimates that other service costs are $41,000 plus $5 for each customer (ride) in excess of 3,500 rides. Annual administrative and marketing costs are estimated to be $23,000 plus 10 percent of the contribution margin.
Required:
Prepare an analysis of the possible operating income for Classic Limo, Inc., similar to that in Exhibit 13.15. What is the range of possible operating incomes?
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