Jet Airlines, a small two-plane passenger airline, has asked for your assistance

Question

Jet Airlines, a small two-plane passenger airline, has asked for your assistance in the analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Jet's base airport to the major city in the province, Centropolis. Each month 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-prot income statement.

Fare revenues (400 fares)                   $50,000

Variable costs

Fuel                           $17,900

Snacks and drinks       1,400

Landing fees              2,000

Supplies and forms    1,200                   22,500

Contribution margin                              27,500

Fixed costs

Depreciation               3,000

Salaries                       15,000

Advertising                  2,250

Airport hangar fees      1,750                22,000

Operating Income                               $ 5,500

Instructions

a) Calculate the break-even point in (1) dollars and (2) number of fares (3 Points)

b) If fares were decreased by 10%, an additional 80 fares could be generated. However, total

variable costs would increase by 20%. Should the fare decrease be adopted? (5 Points)

Explanation / Answer

a) Calculate the break-even point in (1) dollars and (2) number of fares (3 Points)

contribution margin ratio = Contribution/sales = 27500/50000 = 55%

Revenue per fare = 50000/400 =$ 125

b) If fares were decreased by 10%, an additional 80 fares could be generated. However, total

variable costs would increase by 20%. Should the fare decrease be adopted? (5 Points)

Present Variable cost per fare = 22500/400 = 56.25

Revised Variable cost per fare = 56.25*120% = $67.50

Present Revenue per fare = 50000/400 =$ 125

Revised Revenue per fare = 125*90% = $112.50

Revised no of fares = 400+ 80 =480

Revised Total contribution = (112.50-67.50)*480 = $ 21600

Net loss on adopt of this plan = 27500 -21600 = $ 5900

Since Presently company earn contribution margin of $ 27500 which is more than this decision ,

so company should not adopt the fare decrease plan

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