Questions:
Mensa Mountaineering Company (MMC) provides guided mountain climbing expeditions in the Rocky Mountains. Its only major expense is guide salaries; it pays each guide $4,800 per climbing expedition. MMC charges its customers $1,500 per expedition and expects to take five climbers on each expedition.
Part 1
Base your answers on the preceding information.
Required
a. Determine the total cost of guide salaries and the cost of guide salaries per climber assuming that four, five, or six climbers are included in a trip. Relative to the number of climbers in a single expedition, is the cost of guides a fixed or a variable cost?
b. Relative to the number of expeditions, is the cost of guides a fixed or a variable cost?
c. Determine the profit of an expedition assuming that five climbers are included in the trip.
d. Determine the profit assuming a 20 percent increase (six climbers total) in expedition revenue. What is the percentage change in profitability?
e. Determine the profit assuming a 20 percent decrease (four climbers total) in expedition revenue. What is the percentage change in profitability?
f. Explain why a 20 percent shift in revenue produces more than a 20 percent shift in profitability. What term describes this phenomenon?
Part 2
Assume that the guides offer to make the climbs for a percentage of expedition fees. Specifically, MMC will pay guides $960 per climber on the expedition. Assume also that the expedition fee charged to climbers remains at $1,500 per climber.
Required
g. Determine the total cost of guide salaries and the cost of guide salaries per climber assuming that four, five, or six climbers are included in a trip. Relative to the number of climbers in a single expedition, is the cost of guides a fixed or a variable cost?
h. Relative to the number of expeditions, is the cost of guides a fixed or a variable cost?
i. Determine the profit of an expedition assuming that five climbers are included in the trip.
j. Determine the profit assuming a 20 percent increase (six climbers total) in expedition revenue. What is the percentage change in profitability?
k. Determine the profit assuming a 20 percent decrease (four climbers total) in expedition revenue. What is the percentage change in profitability?
l. Explain why a 20 percent shift in revenue does not produce more than a 20 percent shift in profitability.