Question

Wildlife Escapes generates average revenue of $ 6,250 per person on itsâ 5-day package tours to wildlife parks in Kenya. The variable costs per person are asâ follows:

Airfair.............................$1,600Hotel .............................$3,100Meals.............................600Transportation................300Park tickets/other costs...700Total...............................$6,300
Annual fixed costs total $ 500,000.
Requirement:
1. Calculate the number of package tours that must be sold to break even. Determine the formula used to calculate the breakeven number ofâ units, then calculate the number of package tours that must be sold to break even.

Answer 1

The formula can be derived by the following formula:

As we know

Sales - Cost = Profit

Sales - Total Variable Cost - Total Fixed Cost = Profit

(Sales - Total Variable Cost) - Total Fixed Cost = Profit

(Total Contribution) - Total Fixed Cost = Profit

(Total Contribution) = Profit + Total Fixed Cost

Contribution per unit * Number of units = (Profit + Total Fixed Cost)

Number of units = (Profit + Total Fixed Cost)/ Contribution per unit

Breakeven Point is the number of units at which we are at no profit no loss position.

At this position, Profit = zero

Number of units = Total Fixed Cost/ Contribution per unit.........Equation1

Now we can see that their is no contribution per unit as the sales per person is $6250 whereas the total variable cost is $6300. This means there is no contribution as:

Sales per person $6250 > Total variable cost is $6300

Contribution per unit = Sales Revenue per unit - Total variable cost

By putting values:

Contribution per unit = $6250 - $6300= -$50 loss

Losses can not cover the fixed cost or additional sales can not convert losses into profit.

Correct figure for sales amount is $7500

Now

Contribution per unit = Sales per unit - Total Variable cost per unit

Contribution per unit = $7500 - $6300= $1200 per unit

Putting values in the Equation 1

Number of units = 500,000/ $1200= 416.67 units of sales.