A large corporation maintains a fleet of three 30-passenger corporate jets that

Question

A large corporation maintains a fleet of three 30-passenger corporate jets that provide daily scheduled service between Detroit & several cities that are home to its production facilities. The jets are used strictly for business travel. The executives bood reservations thru a centralized transportation office. Because of the limited number of seats available, the planes almost always fly full. Excess demand for seats is assigned by executive rank within the firm. The executive's budget is charged for the flight at the end of the month. The charge is based on the jet's total operating expenses during the month (to include fuel, pilot's salary & fringes, maintenance, licensing & landing fees, and 1/2 of the annual accounting depreciation) divided by the actual passenger miles logged in the month. This rate per passenger is multiplied by each passenger's mileage flown in the month.
A. Describe the formula being used to calculate the cost per passenger mile flown.
B. As passenger miles flown increases, what happens to the cost per passenger mile?
B. Describe what causes the monthly charge per passenger mile flown to fluctuate?
D. What other problems are present in the current system and what improvements do you suggest making?

Explanation / Answer

A.Cost per passenger mile flown = jet's total operating expenses during the month/ actual passenger miles flown during the month. 1. Total operating expenses include costs of fuel,pilot's salary & fringes, maintenance, licensing & landing fees, and 1/2 of the annual accounting depreciation during the month. 2. Actual passenger miles = Miles travelled during the month * number of passengers B.In the above computation in A,Passenger miles is in the denominator.As the number of passenger miles increase, the cost per passenger mile decreases. This is mainly due to the decrease in the fixed cost per passenger mile. C.Monthly cost per passenger mile flown may fluctuate due to change in the operating costs or change in the actual passenger miles D. In the current system cost per passenger mile is calculated by using actual passenger miles. It is suggested to use estimated passenger miles per month to determine the cost. The operating costs are to be divided into fixed costs, variable operating costs and semi variable operating costs to exercise cost control.

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