Exercise 19-4 (Part Level Submission) Comfi Airways, Inc., a small two-plane pas
ID: 2569246 • Letter: E
Question
Exercise 19-4 (Part Level Submission) Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi's base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement. $64,000 Fare revenues (400 passenger flights) Variable costs Fuel Snacks and drinks Landing fees Supplies and forms $21,440 720 1,800 1,000 24,960 39,040 Contribution margirn Fixed costs Depreciation Salaries Advertising Airport hanger fees 2,950 14,470 600 1,500 19,520 Net income $19,520Explanation / Answer
1. Break-even point in dollars = Total fixed costs / Contribution margin ratio
Contribution margin ratio = Contribution margin / Fare revenues = $39040 / $64000 = 61%
Break-even point $ = $19520 / 61% = $32000
2. Break-even point in number of passenger flights = Total fixed costs / Contribution margin per flight
Contribution per flight = $39040 / 400 = $97.60
Break-even point in number of passenger flights = $19520 / $97.60 = 200 flights
3. Contribution margin at break-even point = Total fixed costs = $19520
4. Current ticket prices = $64000 / 400 = $160
Revised ticket prices = $160 – 10% = $144
Current passenger flights = 400
Revised passenger flights = 400 + 25% = 500
Current total variable costs = $24960
Revised total variable costs = $24960 + 25% = $31200
(1) Net income = Fare revenue – Total variable costs – Total fixed costs = ($144 x 500) - $31200 - $19520 = $72000 - $31200 - $19520 = $21280
Net income increase to $21280
(2) Should the ticket price decrease be adopted? YES
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