Cadillac Cody case

ACCT 6305: 0I1 December 10, 2012

Analysis by: Kiran Cheriyan Valentina Izotova Jing Lu Vineethkumar Yogimath Zihan Zhu
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Case I: Two groups recently contacted Cody about employing his services. Unfortunately, both groups will be arriving at the Miami airport this coming Tuesday, and one group wants to book a oneway trip to the Upper Keys while the other group wants to book a one-way trip to the Lower Keys. Cody already has scheduled a trip to the Upper Keys for the morning, so he will only be able to take one of the two groups. (Note: if he takes the group wishing to go to the Lower Keys, this will make for a long day.) On this particular Tuesday Cody will not be able to book a group for either return trip (i.e., his bus will be empty on the drive back). Which group should Cody book, and by how much will Cody's overall (business + personal) income increase by booking this group?

After calculating the total income for the second trip to both the Upper Keys and Lower keys, we come to the conclusion that the Upper Keys trip is more profitable. The trip to the Upper Keys generates a business income of $49.81 and personal income of $45.00 (total of $94.81), while the trip to the Lower Keys generates a business loss of $2.19 and personal income of $75.00 (total of $72.81). To calculate the income for both trips, we assumed that the revenue generated is what Cody receives for a one way trip to Upper Keys and Lower Keys ($300 and $500 respectively). Since Cody is driving to the Keys and back, we used the roundtrip mileage to calculate costs. So for the cost of bus, it was the cost of bus per mile (calculated by taking the cost of the bus and dividing it by the total miles driven the previous year) multiplied by 160 miles for the Upper Keys and 400 miles for the Lower Keys. The office operating expenses were calculated by taking the total office operating expenses, dividing it by 365 days to get the per day cost and then

dividing it by two to get the half day cost (since Cody already had the first half of the day booked). This was the same for both the Upper Keys trip and the Lower Keys trip. The fuel and oil costs were calculated by taking the cost in gas and oil per mile (given to us) and multiplying it to the total miles driven for each trip. The bus-related insurance per day was calculated by taking the $10,000 annual cost and dividing that by 365 days. The maintenance cost per mile was already provided. So in order to get the bus-related insurance and maintenance costs, we took the per day insurance cost and divided it by two (to get the half day costs) and also multiplied the maintenance cost per mile by the mileage driven by Cody for the two trips. The brochures and advertising costs per day was calculated by taking the $5,000 annual cost and dividing that by 365 days. This cost was then divided by two to get the half day costs. The personal income is a fixed 15% of total revenue and that was included to get the total income for each trip. Detailed calculations are provided in the Appendix portion of the report.

Case II: Assume that if Cody books the group traveling to the Upper Keys, then he will be able to book another group for the return trip to the Miami airport. Unfortunately, Cody will not be able to book another group for the return trip if he goes to the Lower Keys. How does this piece of information affect your answer to part (a)? In other words, which group should Cody book, and by how much will his overall (business + personal) income increase by booking this group?

After the extra information, the decision still stays the same. However, the income for the trip to the Upper Keys increases due to the roundtrip revenue. The costs for both the Upper Keys trip and Lower Keys trip remained the same from the first case. The roundtrip for the Upper Keys trip generates a business income of $349.81 and personal income of $90.00 (total $439.81). The Lower Keys income stays the same since there was no modification to that scenario. A breakdown of the income statement is available in the Appendix.

Case III: Cody and his wife are planning an upcoming vacation (their first vacation in years). They would like to take a week (7 days) off and are considering taking their vacation in either the first week in March (during Cody's peak business season) or during the second week in July (during Cody's off-peak business season). How much business and personal income would Cody expect to sacrifice if he and his wife schedule their trip for March? How much business and personal income would Cody expect to sacrifice if he and his wife schedule their trip for July? (Hint: Prepare a contribution margin statement segmented by trips made during the peak season and trips made during the off-peak season; consider both business and tip income).

If Cody and his wife take their trip during the peak season, they would sacrifice a weekly income of $2,759.63 (Business: $1,814.63; Personal: $945). If they plan their trip during the off-peak season, they would sacrifice a weekly income of $476.63 (Business: $26.63;

Personal: $450). This is an average calculation based on the previous year data and that the trips made during the peak/off-peak season were consistent per week. We knew that the previous year annual Upper Key trips were 400. Of the 400 trips, 275 were during the peak season and 125 were in the off-peak season. The Lower Key trips were 200, of which 140 were during the peak season and 60 were during the off-peak season. The average weekly trips were calculated for each peak/off-peak season by taking the total trips and dividing it by 24. The methods of calculating the costs for both the peak season and off-peak season were the same. We used the previous year break down of total miles driven to separate the Upper Key total income and Lower Key total income to get a total income for a week in March (peak) and a week in July (off-peak). The numbers and breakdown of the income statement is provided in the Appendix.

Case IV: One of Cody's friends mentions to him that hotels and airlines seem to offer discounts during their off-peak seasons (to spur additional demand). This friend suggests that Cody follow a similar strategy. Since most of Cody's costs are fixed, the friend believes that Cody could clean up with such a strategy. Specifically, Cody's friend believes that Cody would increase his offpeak volume by 60% if he cut his fares by 25% during the off-peak season. By how much would Cody's overall income increase if the friend's numbers are accurate (assume Cody's mileage during the off-peak season will increase by 40%, and not 60%, because he will have fewer deadhead trips). Next, evaluate the friend's advicein particular, why might such a strategy work well for higherpriced items like airfare and hotels but not work as well for lower-priced items like a shuttle bus?

Based on Codys current strategy, the company generates $11,439.12 during the 6-month off-peak season. We used the same method of calculating costs and revenue from the previous cases. The revenue was calculated by taking the weekly off-peak revenue of $1,500 and multiplying that by 24. The costs were also attained using the same method of taking the weekly off-peak costs and multiplying that by 24. By using his friends strategy, which he assumes would increase off-peak volume by 60%, we calculated that the company would generate $12,133.70 income for the 6 months. This was also taking into account a 25% cut in his fares and a 40% increase in mileage. This is a 6.1% increase in total income for Cody if the new strategy is accurate. Calculations and a breakdown of the income statement are provided in the Appendix portion of the report.

The strategy might not work as well as he states it would because off-peak seasons are based on interest of tourists rather than costs. Codys business volume is not going to be greatly impacted by a cut in fares because the off-peak seasons are times when tourists are not large in numbers. Higher-priced items such as airfare and hotels would get impacted however since those are more in demand and they have a larger customer base. Hotels and airfare are used more frequently than a shuttle bus service and will attract more customers during off-peak seasons.

APPENDIX

Income Statement:

Fiscal Year Revenue Cost of bus (net of salvage value) Office operating expenses Fuel & oil costs Bus-related insurance & maintenance costs Brochures & advertising costs Business income Cost of bus per mile Cost in gas and oil per mile Insurance cost per day Maintenance costs per mile Brochures & advertising costs per day Office operating expenses per day

$ $ $ $ $ $ $ $ $ $ $ $ $

220,000 (60,000) (45,000) (30,000) (25,000) (5,000) 55,000 (0.60) (0.30) (27.40) (0.15) (13.70) (123.29)

Miles driven previous year = 62,500 (peak) + 37,500 (off-peak) = 100,000 Cost of bus per mile = $60,000 / (62,500 + 37,500) = $0.60 Insurance cost per day = $10,000 (fixed insurance cost) / 365 = $27.40 Brochures & advertising costs per day = $5,000 / 365 = $13.70 Office operating expenses per day = $45,000 / 365 = $123.29

Case I:

Revenue for Upper Keys Cost of bus (net of salvage value) Office operating expenses Fuel & oil costs Bus-related insurance & maintenance costs Brochures & advertising costs Business income for Upper Keys trip Personal income Total income for Upper Keys trip Revenue for Lower Keys Cost of bus (net of salvage value) Office operating expenses Fuel & oil costs Bus-related insurance & maintenance costs Brochures & advertising costs Business income for Lower Keys trip Personal income Total income for Lower Keys trip

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

300.00 (96.00) (61.64) (48.00) (37.70) (6.85) 49.81 45.00 94.81 500.00 (240.00) (61.64) (120.00) (73.70) (6.85) (2.19) 75.00 72.81

Cost of bus (Upper Keys) = $0.60 x (80 + 80) = $96.00 (80 miles from airport to Upper Keys and 80 miles return from Upper Keys) Cost of bus (Lower Keys) = $0.60 x (200 + 200) = $240.00 (200 miles from airport to Lower Keys and 200 miles return from Lower Keys) Office operating expenses (Upper Keys, Lower Keys) = $45,000 / 365 / 2 (Office operating expenses per day was divided by two to get half a days office operating expense since half the day was already scheduled for)

Fuel & oil costs = $0.30 x (80 + 80) = $48.00 (Fuel and oil costs per mile was multiplied by the total miles driven for the trip) Fuel & oil costs = $0.30 x (200 + 200) = $120.00 (Fuel and oil costs per mile was multiplied by the total miles driven for the trip) Bus-related insurance & maintenance costs (Upper Keys)= ($27.40 / 2) + ($0.15 x 160) = $37.70 (Insurance per day was divided by two since half the day was already scheduled for and the maintenance costs per mile was multiplied by 160 miles)
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Bus-related insurance & maintenance costs (Lower Keys)= ($27.40 / 2) + ($0.15 x 400) = $73.70 (Insurance per day was divided by two since half the day was already scheduled for and the maintenance costs per mile was multiplied by 400 miles)

Brochures & advertising costs = $13.70 / 2 = $6.85 (Brochures and advertising costs per day was divided by two to get the half day costs) Personal income is $15% of the total revenue

Case II:

Revenue for Upper Keys round-trip Cost of bus (net of salvage value) Office operating expenses Fuel & oil costs Bus-related insurance & maintenance costs Brochures & advertising costs Business income for Upper Keys trip Personal income Total income for Upper Keys trip Revenue for Lower Keys Cost of bus (net of salvage value) Office operating expenses Fuel & oil costs Bus-related insurance & maintenance costs Brochures & advertising costs Business income for Lower Keys trip Personal income Total income for Lower Keys trip

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

600.00 (96.00) (61.64) (48.00) (37.70) (6.85) 349.81 90.00 439.81 500.00 (240.00) (61.64) (120.00) (73.70) (6.85) (2.19) 75.00 72.81

Costs were the same for both the trips. The Revenue for the Upper Keys trip doubled since it was a round trip. Revenue for the Lower Keys trip remained the same.

Case III:

Previous year analysis indicates: Total annual Upper Key trips Peak season average per week Off-peak season average per week Total annual Lower Key trips Peak season average per week Off-peak season average per week Miles in peak season Miles in off-peak season

400 275 11 125 5 200 140 6 60 3 62,500 37,500

We are assuming that the trips per week are an average based on previous year analysis.

Upper Key trips (peak season average per week) = 275 / 6 / 4 = 11 trips Upper Keys trips (off-peak season average per week) = 125 / 6 / 4 = 5 trips Lower Key Trips (peak season average per week) = 140 / 6 / 4 = 6 trips Lower Key Trips (off-peak season average per week) = 60 / 6 / 4 = 3 trips

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Scenario I: Peak season (March) per week Revenue Cost of bus Fuel & oil cost Bus-related maintenance costs Contribution margin Office operating expenses Bus related insurance Brochures & advertising costs Business income Personal income Total income Upper Keys $ 3,300.00 $ (528.00) $ (264.00) $ (132.00) $ 2,376.00 $ (863.01) $ (191.78) $ (95.89) $ 1,225.32 $ 495.00 $ 1,720.32 Lower Keys $ 3,000.00 $ (720.00) $ (360.00) $ (180.00) $ 1,740.00 $ (863.01) $ (191.78) $ (95.89) $ 589.32 $ 450.00 $ 1,039.32 $ 2,759.63 $ $ $ $ $ $ $ $ $ $ $ Total 6,300.00 (1,248.00) (624.00) (312.00) 4,116.00 (1,726.03) (383.56) (191.78) 1,814.63 945.00 2,759.63

Total average weekly income generated in peak season: Scenario II: Off-peak season (July) per week Revenue Cost of bus Fuel & oil cost Bus-related maintenance costs Contribution margin Office operating expenses Bus related insurance Brochures & advertising costs Business income Personal income Total income Upper Keys $ 1,500.00 $ (240.00) $ (120.00) $ (60.00) $ 1,080.00 $ (863.01) $ (191.78) $ (95.89) $ (70.68) $ 225.00 $ 154.32

$ $ $ $ $ $ $ $ $ $ $ $

Lower Keys 1,500.00 (144.00) (72.00) (36.00) 1,248.00 (863.01) (191.78) (95.89) 97.32 225.00 322.32 476.63

Total $ 3,000.00 $ (384.00) $ (192.00) $ (96.00) $ 2,328.00 $ (1,726.03) $ (383.56) $ (191.78) $ 26.63 $ 450.00 $ 476.63

Total average weekly income generated in peak season:

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Case IV:

Off-peak season income (based on previous year data): Upper Keys Revenue $ 36,000.00 Cost of bus $ (5,760.00) Fuel & oil cost $ (2,880.00) Bus-related maintenance costs $ (1,440.00) Contribution margin $ 25,920.00 Office operating expenses $ (20,712.33) Bus related insurance $ (4,602.74) Brochures & advertising costs $ (2,301.37) Business income $ (1,696.44) Personal income $ 5,400.00 Total income $ 3,703.56 Off-peak season income after friend's strategy: Current annual off-peak mileage New strategy mileage Cost of bus per mile Off-peak season Upper Key Lower Key Off-peak season income (based on new strategy): Revenue Cost of bus Fuel & oil cost Bus-related maintenance costs Contribution margin Office operating expenses Bus related insurance Brochures & advertising costs Business income Personal income Total income $ $ $ $ $ $ $ $ $ $ $ 81,000.00 (27,391.30) (15,750.00) (7,875.00) 29,983.70 (22,500.00) (5,000.00) (2,500.00) (16.30) 12,150.00 12,133.70 37,500 52,500 (0.52) Current 125 60

$ $ $ $ $ $ $ $ $ $ $

Lower Keys 36,000.00 (3,456.00) (1,728.00) (864.00) 29,952.00 (20,712.33) (4,602.74) (2,301.37) 2,335.56 5,400.00 7,735.56

$ $ $ $ $ $ $ $ $ $ $

Total 72,000.00 (9,216.00) (4,608.00) (2,304.00) 55,872.00 (41,424.66) (9,205.48) (4,602.74) 639.12 10,800.00 11,439.12

New strategy 200 $ 96 $

Fares 225.00 375.00

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Cost of bus per mile = $60,000 / (52,500 + 62,500) = $0.52 (The current annual off-peak mileage would have a 40% increase, which will be 52,500 miles. This along with the peak mileage would total 115,000 miles)

New strategy trips (Upper Key): 200 trips is a 60% increase from the 125 trips. New strategy trips (Lower Key): 96 trips is a 60% increase from the 60 trips. New strategy fare (Upper Key): $225.00 is a 25% cut in current fares. New strategy fare (Lower Key): $375.00 is a 25% cut in current fares.

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