Reference no: EM132690733
Problem - Product costing and decision analysis for a passenger airline
Blue Skies Airline provides passenger airline service, using small jets. The airline connects four major cities: Atlanta, Cincinnati, Chicago, and Los Angeles. The company expects to fly 140,000 miles during a month. The following costs are budgeted for a month:.
|
Fuel
|
$1,450,000
|
|
Ground personnel
|
693,250
|
|
Crew salaries
|
710,000
|
|
Depreciation
|
360,000
|
|
Total costs
|
$3,213,250
|
Blue Skies management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs:
|
Airline Cost
|
Activity Base
|
|
Fuel, crew, and depreciation costs
|
Number of miles flown
|
|
Ground personnel
|
Number of arrivals and departures at an airport
|
The size of the company's ground operation in each city is determined by the size of the workforce. The following monthly data are available from corporate records for each terminal operation:
|
Terminal City
|
Ground Personnel
|
Number of Arrivals/Departures
|
|
Atlanta
|
$224,750
|
290
|
|
Cincinnati
|
84,000
|
120
|
|
Chicago
|
114,800
|
140
|
|
Los Angeles
|
269,700
|
310
|
|
Total
|
$693,250
|
860
|
Three recent representative flights have been selected for the profitability study. Their characteristics are as follows:
|
Description
|
Miles Flown
|
Number of Passengers
|
Ticket Price per Passenger
|
|
Flight 101
|
Atlanta to LA
|
1,850
|
70
|
$650
|
|
Flight 102
|
Chicago to Atlanta
|
600
|
45
|
400
|
|
Flight 103
|
Atlanta to Cincinnati
|
350
|
20
|
350
|
Instructions -
1. Determine the fuel, crew, and depreciation cost per mile flown.
2. Determine the cost per arrival or departure by terminal city.
3. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs.
4. Evaluate flight profitability by determining the break-even number of passengers required for each flight assuming all the costs of a flight are fixed. Round to the nearest whole number.