A guide to assignment on the case study of a parasailing company performing contribution margin and breakeven analysis. Includes detailed calculations and data limitation. Finally, a conclusion and recommendation with sufficient references are provided.
In this paper, please discuss the following case study. In doing so, explain your approach to the
problem, support your approach with references, and execute your approach. Provide an answer
to the case study’s question with a recommendation.
You are the owner of a parasailing company that is expanding operations to a new beachfront
location, and you need to prepare a 3-year analysis for the bank that may loan you the funds to
purchase your boat and parasailing equipment. A lot of business is done on a referral basis,
where a company pays a fee to a 3rd party to send them customers. However, because of your
well-established reputation, you already have received requests for “flights” to be scheduled as
soon as you open the new location. Therefore, you expect to break-even the first year but must
calculate the number of flights needed. You also need to determine the new break-even point in
Year 2 if the location allows referrals, which you believe will cost on average about 2% of the
sales price overall. Finally, you need to determine the volume needed to have $10,000 in profit in
Year 3. The following information is available:
Sales price per flight $175
Estimated loan payment per month $350
Fuel costs per flight $100
Full-time scheduler salary $2,500 per month
Boat crew per flight $30
$500 per month dock fee and use of a small office on a pier
Requirements:
, Calculate the Year 1 break-even quantity, contribution margin, and contribution margin
ratio. Explain how the values were determined.
Calculate the Year 2 break-even quantity, break-even sales, and contribution margin
ratio. Explain how the values were determined.
Determine the number of flights (units) needed to retain a profit of $10,000 in Year 3,
assuming the company does allow for referrals.
Recommend if the bank should issue the loan.
Case Study - Parasailing Company
Contribution Margin is a measure of the difference between the total sales revenue of the
company and the variable costs incurred by the company (LaMarco, 2018). Management uses
this value to make various decisions. The contribution margin ratio is the percentage of a unit’s
selling price that exceeds total unit variable costs (Graybeal, 2018). The formula we use to
calculate these values is presented below.
To calculate the above two values we first need to identify which costs are fixed and which are
variable costs. A fixed cost is a cost that does not change with an increase or decrease in the
number of goods or services produced or sold (Hayes, 2021a). These costs include rent, loan
repayment, and salaries. Variable costs are costs that change with the number of goods produced
or sold.
The breakeven point is a point where the company makes zero profit. At a breakeven point, the
total sales will be equal to the total variable cost plus total fixed costs.
Sales = Total Variable Costs + Total Fixed Costs
Year 1 Calculations
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