Lakeside Tours operates a large number of tours throughout the United States. A study has indicated that some of the tours are not profitable, and consideration is being given to dropping these tours in order to improve the company's overall operating performance. One such tour is a two-day Battlefields of the Civil War bus tour. An income statement from one of these tours is given below: Ticket revenue (100 seats × 45% occupancy × $80 ticket price) $3,600 100% Less variable expenses ($24 per person) 1,080 30% Contribution margin 2,520 70% Less fixed tour expenses: Tour promotion $620 Salary of bus driver 400 Fee, tour guide 825 Fuel for bus 100 Depreciation of bus 400 Liability insurance, bus 250 Overnight parking fee, bus 50 Room and meals, bus driver and tour guide 75 Bus maintenance and preparation 325 Total fixed tour expenses 3,045 Net operating loss $ (525) Dropping this tour would not affect the number of buses in the company's fleet or the number of bus drivers on the company's payroll. Buses do not wear out through use; rather, they eventually become obsolete. Bus drivers are paid fixed annual salaries; tour guides are paid for each tour conducted.
The "Bus maintenance and preparation" cost above is an allocation of the salaries of mechanics and other service personnel who are responsible for keeping the company's fleet of buses in good operating condition. There would be no change in the number of mechanics and other service personnel as a result of dropping this tour. The liability insurance depends upon the number of buses in the company's fleet and not upon how much they are used. continued Required: A. Prepare an analysis showing what the impact will be on company profits if this tour is discontinued. B. The company's tour director has been criticized because only about 50% of the seats on the company's tours are being filled as compared to an average of 60% for the industry. The tour director has explained that the company's average seat occupancy could be improved considerably by eliminating about 10% of the tours, but that doing so would reduce profits. Do you agree with the tour director's conclusion? Explain your response. You do not have to make any computations to answer this question.