Question

3. Bristol Car Service offers airport service in a mid-size city. Bristol charges $34 per trip to or from the airport. The variable cost for a trip totals $20, for fuel, driver, and so on. The monthly fixed cost for Bristol Rainbow Tours is $3,220.

Required:

a. How many trips must Bristol sell every month to break even?

b. Bristol's owner believes that 240 trips is a reasonable forecast of the average monthly demand. What is the margin of safety in terms of the number of airport trips?

4. Hunter & Sons sells a single model of meat smoker for use in the home. The smokers have the following price and cost characteristics:

Sales price	$	75	per smoker
Variable costs		39	per smoker
Fixed costs		288,000	per month

Hunter & Sons is subject to an income tax rate of 40 percent.

Required:

a. How many smokers must Hunter & Sons sell every month to break even?

b. How many smokers must Hunter & Sons sell to earn a monthly operating profit of $45,360 after taxes?

Answer 1

3.

Revenues per trip = $34

Variable costs per trip = $20

Contribution margin per trip = Revenues per trip - Variable costs per trip

= $34 - $20

= $14

Fixed cost = $3,220

a.

Trips every month to break even = Fixed cost / Contribution margin per trip

= $3,220 / $14

= 230

Margin of safety = Monthly demand - Break even trips

= 240 - 230

= 10 trips

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4.

Contribution margin per smoker = Sales price per smoker - Variable costs per smoker

= $75 - $39

= $36

a.

Smokers to be sold to break even = Fixed costs / Contribution margin per smoker

= $288,000 / $36

= 8,000

b.

Operating income before tax = $45,360 / (1 - 0.4)

= $75,600

Smokers to be sold = (Fixed costs + Operating income before tax) / Contribution margin per unit

= ($75,600 + $288,000) / $36

= 10,100