In addition to answering question 1 in the photo, I need the following question

Question

In addition to answering question 1 in the photo, I need the following question in bolded text answer, please and thank you.

If they change to different prices for different types of passengers how much will their contribution margin increase or decrease?  This is the question that is confusing, and how to arrive at that answer ^.

Thanks.

13-34 Airline pricing, considerations other than cost in pricing. Costal Airways is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round-trip tickets The market research group at Costal Airways segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents: Number of Seats Expected to Be Sold Variable Cost per Ticket $65 150 Business 225 215 Pleasure 110 25 Price Charged $600 ,350 Pleasure travelers start their travel during one week, spend at least one weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends. Assume that round-trip fuel costs are fixed costs of $18,500 and that fixed costs allocated to the round-trip flight for airplane- lease costs, ground services, and flight-crew salaries total $150,000. 1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations. Required

Explanation / Answer

Contribution margin if price is $600

Particulars

Amount ($)

Amount ($)

Business:

Number of seats expected to be sold

225

Revenue

135000

(600 X 225)

Less: Variable cost

14625

(225 X 65)

Contribution

120375

Pleasure:

Number of seats expected to be sold

110

Revenue

66000

(110 X 600)

Less: Variable cost

7150

(110 X 65)

Contribution

58850

Total contribution

179225

Contribution margin if price is $1350

Particulars

Amount ($)

Amount ($)

Business:

Number of seats expected to be sold

215

Revenue

290250

(215 X 1350)

Less: Variable cost

32250

(215 X 150)

Contribution

258000

Pleasure:

Number of seats expected to be sold

25

Revenue

33750

(25 X 1350)

Less: Variable cost

3750

(25 X 150)

Contribution

30000

Total contribution

288000

Different prices to different travellers:

Contribution:

Particulars

Amount ($)

Amount ($)

Business (Price $1350):

Number of seats expected to be sold

215

Revenue

290250

(215 X 1350)

Less: Variable cost

32250

(215 X 150)

Contribution

258000

Pleasure (Price $600):

Number of seats expected to be sold

110

Revenue                                        

66000

(110 X 600)

Less: Variable cost

7150

(110 X 65)

Contribution

58850

Total contribution

316850

Thus, as can be seen from the above table that if the Airline charges different prices for business and pleasure travellers then the overall contribution will be higher compare to the single price charging to both business as well as pleasure travellers. Hence, charging $1,350 to business travellers and $600 to pleasure travellers will give the maximum amount of contribution margin to the Airline at $316,850 as can be seen in the table above.

Contribution margin if price is $600

Particulars

Amount ($)

Amount ($)

Business:

Number of seats expected to be sold

225

Revenue

135000

(600 X 225)

Less: Variable cost

14625

(225 X 65)

Contribution

120375

Pleasure:

Number of seats expected to be sold

110

Revenue

66000

(110 X 600)

Less: Variable cost

7150

(110 X 65)

Contribution

58850

Total contribution

179225

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