Health Cruises Homework
1. What is the minimum number of passengers Health Cruises must sign up by November 20th to break even? *Fixed costs = $220,000 (Ship rental and crew) + $65,000(initial advertisement expense) +$10,000(administrative expense) = $295000 *Contribution per unit = $1500 -$200 = $1300 *Breakeven point (in units)= 295000/1300 = 226.92
: At least 227 passengers should sign up for Health Cruises by November 20th.
2. Should Health Cruises go ahead with the cruise since 200 people have signed up by November 14th? Why or why not? : Though I concede that Health Cruises do not reach the break-even point and is very likely to make loss at this situation, I suggest them to keep running this trip from a long term perspective.
The company should not consider only financial issue in operating business and miss an opportunity to make huge profits and create new spectrum of service. If Health Cruise efficiently proceed this trip and offer fine quality of service to these 200 passengers, this package cruises would go famous through word of mouth and gain effective advertising effect. Also, the company can better understand the operating system of its product and reconstruct its business and financial system to make profit.
Therefore, instead of losing enormous amount of fixed costs by cancelling this whole cruise, I believe Health Cruises should present its product regardless of its current financial status.
3. The advertising agency has proposed two alternative campaigns to help fill the boat. One will cost $6000 and the other would cost $15,000. Which would you suggest? *Breakeven point including = 295000+6000/1300 = 232
another ads cost $6,000(in units)
* Breakeven point including = 295000+15000/1300 = 239
another ads cost $15,000(in units)
: I suggest the corporation to choose the campaign that costs $15,000 since, as calculation shown above proves, it has higher possibility of bringing enough number of passengers to exceed breakeven point in units and earn profit.
4. Should Health Cruises consider cutting its prices for this trip? Why or why not? What other factors could impact the go/no-go decision in addition to the break even?
: The corporation should not cut its price for this trip because considering the fixed and variable costs its current price which ranges from $1500 to $2200 seems reasonable and at this point where this trip is the first product presenting and only 200 passengers signed up for it, we cannot guarantee that enough number of passengers would come to make profit even if we drop the price. Moreover, Health cruises should consider other internal and external factors to make this trip successful such as other ways to reduce its fixed and variable cost, its competitors’ prices and products and nation’s economic status.