Grear Rafting Analysis

Introduction Grear Rafting Company, possess by Peggy Grear is a confederacy that provides rafting services to r afterwardss. Grear Rafting Company, henceforth referred to as Grear Rafting, has vindicatory gone through its first conciliate in business on which it provided rafting services to 1,048 rafters for seven (7) days. During these seven (7) days, Grear Rafting besides provided meals to the rafters three times a day, it also provides the slews used during the season. During its first season, however, Grear Rafting experienced a loss.Peggy Grear has complete savings to get Grear Rafting through a nonher season or devil of business, but Grear Rafting would have to shut its business down if it does non go a profit (Houston Baptist University, 2012). In this paper, I would show what Grear Rafting requires to break-even and set out a profit. Grear Raftings income statement from its first season is shown below on elude 1. control panel 1. Grear Rafting CompanyIncome State mentYear Ended December 31, 2012 Revenue $1,048,000 Rental set down (208,600) Meals Expense (314,400) Advertising Expense (50,000) earnings to Guides (471,600) Salary Expense (16,500) T-shirts and Hats Expense (31,440) obligation Utility Expense (3,850) Gross Income (Loss) $(48,390) Variable and Fixed Costs there atomic matter 18 different types of be associated with the running of Grear Rafting. In order to farm a plan for Grear Rafting to make a profit, it is necessary to identify those comprises that butt end be changed, and those that fecal matternot be changed. 1. Variable CostA unsettled salute is a live that improvers in conglomeration as make increases and decreases in enumerate as end product decreases. (Rich et al, 2010). For example, cotton used in making cotton shirts is a variant be. As a beau monde makes to a greater extent cotton shirts, it call fors more cotton to produce the shirts. The varying be incurred by Grear Rafting atomi c recite 18 * Meals provided to rafters ($314,400) the rafting trip is for seven (7) days, so as more rafters use Grear Raftings services, Grear Rafting would incur more be in providing meals to the rafters for the time percentage point of seven (7) days.If less rafters use Grear Rafting, the represent of providing meals would decrease. * Compensation paid to guides ($471,600) the compensation paid to the guides is paid on commission basis. Therefore, if more rafters use Grear Raftings services, the commission to the guides would increase, causing the compensation cost to increase as well, and if less rafters use Grear Raftings services, the compensation cost would also decrease. * T-shirts and hats provided to rafters ($31,440) the upshot of rafters that used Grear Rafting this season was 1,048.This incurred the cost of t-shirts and hats of $31,440. If more rafters come in the next season, the cost of providing t-shirts and hats would also increase. So also, if fewer rafters c ome in the next season, the cost of providing t-shirts and hats would decrease. 2. Fixed Cost A fixed cost is a cost that does not increase as total output increases and does not decrease as total output decreases. For example, the cost of plaza taxes on a factory stays the same no take how much the factory produces.The quantity produced does not have an effect on the cost of property taxes they only change because the city or county government raises taxes (Rich et al, 2010). Fixed costs incurred by Grear Rafting in its first season whollyow in * Rental cost of rafts and camping area equipment ($208,600) the rafts and equipment are rented on an annual basis, and additional rafts and equipment are not available to Grear Rafting. Since the rafts and equipment are rented annu wholey, the keep down of rafters does not affect the cost of the rafts and equipment because these are rented not found on the number of rafters expected, but based on what is available. Advertising expen se ($50,000) the cost for advertising Grear Rafting does not depend on how some(prenominal) rafters use Grear Rafting. Advertising is a way to introduce the guild to the public, and whatever advertising way of life Peggy Grear decides to use is billed to Grear Rafting no case how many rafters it serves. * Salary of attitude managing director ($16,500) the salary paid to the office manager is a fixed cost because no matter how many rafters come for the season, the salary is an established amount that is agreed upon by the manager and Peggy Grear.Therefore, the cost of paying salary to the manager is fixed and is not based on how many rafters there are in the season. * Office avail expense ($3,850) this expense is a fixed cost because it is based on the utility-grade that is used in the office and not on the number of rafters there are. fruit and Period Costs 1. Product Cost Product costs are costs, both direct and indirect, of producing a product in a manufacturing firm or o f acquiring a product in a merchandising firm and preparing it for sale (Rich et al, 2010).For example, the metal used in making a car, the hours put into making that car, and depreciation on equipment are product costs. The product costs incurred by Grear Rafting include * Rental cost of rafts and camping equipment ($208,600) this is a product cost because the rafts and camping equipment are rented for the current season. These would be used during the rafting season at Grear Rafting. * Meals provided to rafters ($314,400) this is a product cost because the meals are provided for the rafters during the seven (7) days they are rafting.The meals are not prepared for the long-run, but only for the space of time for the rafting season for Grear Rafting. * Compensation paid to guides ($471,600) the compensation paid to the guides is a product cost because the compensation is paid for the specific rafting season concerned it is not a long term payment to the guides. * T-shirts and Hats p rovided to rafters ($31,440) this is a product cost because the t-shirts and hats provided to the rafters are purchased for the specific season based on how many rafters available. They are not purchased on a long-term basis. . Period Cost Period costs are costs that are not carried in inventory all costs that are not product costs. That is, all areas of the value compass except for production (Rich et al, 2010). For example, costs of advertising, salaries to the CEO, and research and development activities are not added to inventory, thereby making them period costs (Rich et al, 2010). The period costs incurred by Grear Rafting include * Advertising expense ($50,000) the advertising cost is only incurred when Grear Rafting advertises the smart set for rafting services. Salary of office manager ($16,500) the salary of the office manager is a cost that does not deal with production, or in this case, with the activities of Grear Rafting during this season. * Office utility expense ( $3,850) this is a period cost because the cost is expensed in the period it occurs. Break-Even Based on the information provided earlier, there are several changes Peggy Grear can make that would affect Grear Raftings ability to break-even or even make a profit. A breakeven point is the point where total revenues equal total cost, and net income is zero (0).Break-even can be careful in gross revenue dollars and in whole of measurements. Break-even is measured by dividing total fixed cost by the price minus the variant cost per unit and break-even in gross sales dollars is cipher by dividing total fixed expenses by the contribution tolerance ratio. The contribution leeway ratio is the percentage of sales dollars remaining after variant costs are covered (Rich et al, 761). The table below is a contribution bank income statement from which we can understand how to calculate break-even. Table 2.Grear Rafting CompanyContribution marge Income StatementYear Ended December 31, 201 2 Sales ($1,000 X 1,048) wide variable expenses Total contribution mouldingTotal fixed expenses Operating Income Total$1,048,000 817,440 230,560 278,950 (48,390) Per Unit$1,000 780 220 Contribution Margin Income Statement Contribution margin is the difference between sales and variable expenses. It is the amount of sales revenue left over after all the variable expenses are covered that can be used to brook to fixed expense and operating income (Rich et al, 758).To calculate break-even, the Cost-volume-profit (CVP) analysis is needed. CVP analysis estimates how changes in costs, both variable and fixed, sales, volume, and price affect a companys profit. CVP, an important tool used by managerial accountants, is used to dispatch important benchmarks such as a companys break-even point. It is recyclable to organize costs into variable and fixed components for a CVP analysis. The contribution margin income statement format is based on the separation of costs into variable and fixed components. Table two (2) above shows the format for the contribution margin income statement.When recast as an equation, the contribution margin income statement becomes more usable for solving CVP problems. The operating income equation can be expanded by expressing sales revenues and variable expenses in terms of unit dollar amounts and the number of units sold. So, the operating income equation becomes Operating income = (Price x number of units sold) (Variable cost per unit x Number of units sold) Total fixed cost (Rich et al, 758). For a company to break-even, its operating income should equal zero (0). Grear Raftings break-even point will be calculated in units and in sales dollars.For Grear Rafting to break-even, we need to consider the number of rafters that came for the past rafting season. Grear Rafting had 1,048 rafters in the past season to be able to commit break-even, Grear Rafting needs approximately 1,268 rafters. This was determined by dividing the total fixed cost ($278,950) by the price per rafter ($1,000) minus the variable cost per unit ($780). To calculate the break-even point in sales dollars, total variable costs are defined as a percentage of sales rather than as an amount per unit sold. The break-even point in sales dollars for Grear Rafting is $1,268,000).This was calculated by dividing the total fixed cost ($278,950) by the contribution margin ratio (22%) which was calculated by dividing the contribution margin per unit ($220) by the price per rafter ($1,000). The contribution margin per unit was calculated by subtracting the variable cost per unit ($780) from the price per rafter ($1,000). To determine how Grear Rafting can make a profit, there are several costs that need to be reduced. First, however, it is necessary to determine the number of rafters Grear Rafting needs to achieve a target income that would yield a profit.If Grear Raftings target income is $49,000, then the number of units it needs to earn it can be calcul ated by adding the total fixed cost ($278,950) to the target income ($49,000) and dividing it by the price ($1,000) minus the variable cost per unit ($780). The number of units Grear Rafting needs to earn its target income is $1,490. 68 or approximately $1,491 rafters. Therefore, Grear Raftings margin of safety in units, which is calculated by subtracting break-even units (1,268) from sales (1,491), is 223 units, and ts margin of safety in sales dollars, which is calculated by subtracting the break-even volume ($1,268,000) from the revenue ($1,491,000), is $223,000. Recommendations Meals The first cost that needs to be tackled is the cost of meals to the rafters. The cost of meals provided to the rafters in Grear Raftings first season cost $314,000. It can be deduced that Grear Rafting is spending a lot of money on meals for the rafters. To reduce the amount of money spent on meals, Grear Rafting could look for cheaper means of providing meals to the rafters. Impact of Recommendatio ns Conclusion References