Examination of the Facts
Stand-up paddle (SUP) board rentals are available at SUP Rides, a small company run by Matthew, Thomas, and Michael Hahn. The company runs for three months, from June 1 to August 31, and has set expenses during that time. In an effort to increase the company’s revenue and provide them with more funding for school the following year, they are considering three separate choices for the upcoming summer.
Issue
What is the best course of action for SUP Rides to boost their monthly revenue and provide the Hahn siblings with more funding? The three choices are extending their business hours, providing lessons at a higher rental cost, or spending money on advertising to draw in more clients. Finding the strategy that will increase income the most effectively is the problem; there are no obvious ethical issues.
Key Success Factors and Constraints
Managing costs efficiently is one important success factor: they can boost their earnings and make investments for future expansion. In addition to controlling expenses, SUP Rides must make wise expenditures to boost sales. (Lynch, 2021). This might entail increasing the business’s hours or spending money on promotion. The quantity of paddle boards they own and the amount of fixed expenses they can manage to pay are, however, both constrained.
Alternatives
The existing options for SUP Rides are:
- Extend operating hours to 7 hours a day, hire another summer student, and increase Michael’s salary by $400 to work evenings.
- Include a 15-minute lesson in the rental time, increase the price to $40 per hour, and increase Michael’s salary to $1,600 to provide lessons.
- Spend $1,000 per month on advertising and promotion to increase the number of hours the boards are rented to 8 hours per day.
Analysis
Qualitative Information
The brothers can take advantage of the extended daylight hours by extending their business hours. Although choosing this strategy would boost the brothers’ income, it might be offset by the higher salary and hiring costs. (Soojung Kim Pang, 2020). The brothers feel that many people are hesitant to rent SUP boards when it comes to the second choice.
However, customers with prior stand-up paddling expertise might not choose this option. The brothers think that by using advertising, they can bring in more clients and extend the time that the boards are leased. Even though promoting can increase sales, the brothers are unsure if it will be sufficient to cover its costs.
Quantitative Information
The company believes that, with option one, they could hire out their boards for 840 hours per month. Total monthly earnings would be $21,000 as a consequence. The fixed costs of $3,000 per month and the variable cost of $3 per hour stay the same. The monthly contribution margin for this option would be $18,000 (Collier et al., 2013). The company believes that option two will allow them to rent out their boards for of 720 hours per month.
Michael’s monthly salary would rise, bringing all variable expenses to $3,600. Thus, the monthly contribution margin for this choice would be $25,200. Finally, the company considers that with the third option, they might rent out their boards for 960 hours every month. Their $2,880 monthly variable costs are less than their present fixed costs. The monthly contribution margin for this option would therefore be $21,120.
Conclusion and Recommendation
According to the analysis of the three possibilities open to SUP Rides, it is advised that the brothers choose option two. From a qualitative standpoint, offering lessons is a value-added service that can help attract more customers. From a quantitative standpoint, option two’s contribution margin is the highest. SUP Rides might circumvent the challenge of identifying the best price for the lessons by experimenting with various pricing points and making adjustments as needed.
References
Collier, P. M., Kizan, S. M., & Schumann, E. (2013). Accounting for managers: Interpreting accounting information for decision-making. Wiley.
Lynch, R. (2021). Strategic Management. Sage.
Soojung Kim Pang, A. (2020). Shorter: How smart companies work less, embrace flexibility and boost productivity. Penguin.