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Read the following scenario and complete the questions and tasks below.
Brad Winston is the owner and operator of Fishing Unlimited, a charter fishing business operated out of Oregon Inlet, NC. Brad has been taking groups of guests offshore to fish for tuna and marlin for over 15 years. He purchased his current fishing boat when he started the business, but now believes that a larger and better outfitted vessel would allow him to increase the rate he charges per charter. Currently he can carry a maximum of 6 guests while the larger boat will carry up to 8. The larger boat would also require him to take 2 deck hands on each outing, providing better service to his customers. Cost data for Brads business is shown in the table below.
Fishing UnlimitedAnnual straight-line depreciation on boat $ 8,300
($175,000 original cost $90,000 estimated resale value/20 years)
Fuel Cost (per hour) $ 50Insurance Premium (annual) $ 1,900Maintenance and Repairs (annual) $ 3,500Fishing Tackle and Gear (original cost) $ 7,000Tackle and Bait (per guest) $ 20Deck Hand wages (per hour) $ 20Dock Fees (annual) $ 2,400Captains License (annual) $ 200Food and Beverages (per guest) $ 25Professional Fees (per year) $ 750Dock Utilities (annual) $ 1,200
Brad has someone interested in purchasing his existing boat for $80,000. He could use this cash as a deposit on the new boat which will cost him $225,000. His banker estimates the payments on the new boat will be about $1,500. The new boat is more fuel efficient and he believes he can cut his fuel costs by 10% but the more expensive boat will increase his insurance premium by 12%. He is also concerned that he will have to change to a larger boat slip which would increase his dock fees by 5%. The good thing about the new boat is that he should save on maintenance and repairs, at least for the first 3 years. The only other expense Brad would incur with the new boat is adding some additional fishing tackle and gear to accommodate larger parties that he estimates would cost him about $1,500.
His fees for both the old and the new boat are as follows:
Old BoatNew Boat4 hours $ 550 $ 6006 hours $ 650 $ 700Full Day (9 hours) $ 1,100 $ 1,200
- Which costs are relevant to Brads decision to purchase a new, larger boat?
- If Brad decides to purchase a larger boat, what costs will be affected by this decision? Will they increase or decrease?
- Identify any unavoidable costs associated with the operation of Fishing Unlimited.
- Calculate the revenue generated by a 6-hour trip with the old boat (6 guests) and the new boat (8 guests) and compare the two figures. Identify the costs that changed. What conclusion can you draw based on your analysis?
Hint: Your best first step will be to list the current costs and then make adjustments for a list of new costs with the new boat. I suggest doing the side by site analysis in word or excel. Take your time. this is not hard but it is a process with no short cuts
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