Question

Bristol Car Service offers airport service in a mid-size city. Bristol charges $30 per trip to or from the airport. The variable cost for a trip totals $18, for fuel, driver, and so on. The monthly fixed cost for Bristol Rainbow Tours is $1,800.

a. How many trips must Bristol sell every month to break even?
b. Bristol's owner believes that 300 trips is a reasonable forecast of the average monthly demand. What is the margin of safety in terms of the number of airport trips?

Answer 1

a. Bristol needs to make 150 trips to break even

b. The margin of safety is 150 trips

Step-by-step explanation:

The break even point is the level of sales revenues which results in a total coverage of expenses.

The break even point is calculated by dividing the Fixed Costs with the Revenue after considering the variable costs.

So a trip of $ 30 contributes $ 12 towards the fixed costs after deducting the variable costs of $ 18 per trip.

The breakeven point in this question is the total fixed costs divided by the margin, $ 1800/ $ 12 = 150 trips.

The margin of safety is the level where the projected sales is higher than the breakeven point. in the question, the projected trips is 300, so the margin of safety is 300 (projected trips) - 150 (breakeven trips) = 150 trips