Break-Even Sales and Sales Mix for a Service Company Zero Turbulence Airline pro

Question

Break-Even Sales and Sales Mix for a Service Company Zero Turbulence Airline provides air transportation services between Los Angeles, California, and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics: Fuel $5,114 Flight crew salaries 3,917 Airplane depreciation 1,849 Variable cost per passenger—business class 40 Variable cost per passenger—economy class 30 Round-trip ticket price—business class 510 Round-trip ticket price—economy class 280 It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. a. Compute the break-even number of seats sold on a single round-trip flight for the overall enterprise product, E. Assume that the overall product mix is 10% business class and 90% economy class tickets. Total number of seats at break-even seats b. How many business class and economy class seats would be sold at the break-even point? Business class seats at break-even seats Economy class seats at break-even seats

Explanation / Answer

a. Compute the break-even number of seats sold on a single round-trip flight for the overall enterprise product,E. Assume that the overall product mix is 10% business class and 90% economy class tickets.

Contribution Margin of business class = SP - VC = 510 - 40 = $ 470

Contribution Margin of economy class = SP - VC = 280 - 30 = $ 250

Weighted Average CM = ( 470 * 10 % ) + ( 250 * 90 % ) = $ 272

Total number of seats at break-even seats = Fixed costs / Weighted Average CM

( 5114 + 3917 + 1849 ) / 272 = 40 seats

b. How many business class and economy class seats would be sold at the break-even point?

business class = 40 seats * 10 % = 4 seats

economy class = 40 seats * 90 % = 36 seats

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