Case Summary
The business case I decided to analyze is “Sunk Costs: What Costs Do You See?”. It describes the ethical dilemma faced by Festival Cruise Lines (FCL), the largest cruise company in the world (Stuebs et al., 2014). The main challenge faced by the company and its senior accountant, Linda Wright, was the need to balance her responsibility to act in the public interest, according to AICPA, and the necessity to meet the financial needs of the executives, the Board of Directors, and shareholders. After analyzing the market situation, Linda and her team found that the modernization of the company’s cruise ships will improve safety and bring the company long-term profit. However, Linda’s problem is convincing shareholders to provide funding.
Investment Options Considered
Linda’s team analyzed three investment options to improve security: minimum ($100 million), midrange ($250 million), and full ($300 million). The most optimal option is midrange financing, which increases safety by up to 96%, reduces costs in case of accidents, and has fixed costs. In addition, the increased safety will increase the number of passengers to “2.722 million in year one, 3.058 million in year two, and 3.787 million in years following year two” (Stuebs et al., 2014, para. 33).
One passenger brings in 1700 dollars of profit; therefore, in the first year after the improvements, the profit from passengers will be 4.627 billion dollars. Considering the income tax rate, the company has $ 2.776 billion left to be distributed between fixed costs and expenses for possible accidents. The company will need nine years to compensate for the investment and make a profit.
Every year after the second, the company can reduce the difference between income and loss from the investment by $189 million. Therefore, in the 10th year after the improvement, the company will receive the first profit from the investment. Considering that the investment will have a useful life of 15 years, this scenario is optimal for ensuring the safety of the public and increasing profitability in the long term.
Reference
Stuebs, M., Edison, C., & Hurt, K. (2014). Sunk Costs: What Costs Do You Sea? Sage Knowledge. Web.