PROBLEM 4-5- Break-Even, \"What If\" [LO 3] Michael Bordellett is the owner/pilo
ID: 2674221 • Letter: P
Question
PROBLEM 4-5- Break-Even, "What If" [LO 3]Michael Bordellett is the owner/pilot of Bordellet Air Service. The company flies roundtrip from Seattle's Lake Union to a resort in Canada.
In 2010, the company reported an annual income before taxes of $8,084 althoguh that included a deduction of $70,000 reflecting Michael's "salary."
Revenue ($360 X 1,248 passengers) $449,280
Less costs:
Pilot (owner's Salary) $70,000
Fuel (35,657 gallon X $4.15) 147,977
Maintenance (variable) 127,920
Depreciation of plane 25,000
Depreciation of office equipment 2,800
Rent expense 40,000
Insurance 20,000
Miscellaneous (fixed) 7,500 441,197
Income before taxes $8,083
Revenue of $449,280 reflects six round trips per week for 52 weeks with an average of four passengers paying $360 each per round trip
(6 X 52 X 4 X $360 = $449,280). The flight to the resort is 400 miles one way. With 312 round trips (6 per week X 52 weeks), that amounts ro 249,600
miles. The plane averages 7 miles per gallon.
Required: (Round all monetary calculations to the nearest cent and all trips to the nearest whole trip.)
a. How many round trips is Michael currently flying, and how many round trips are needed to break even?
b. How many round trips are needed so that Micheal can draw a salary of $110,000 and still not show loss?
c. What is the average before tax profit of a round trip flight in 2010?
d. What is the incremental profit associated with adding a round trip flight?
Explanation / Answer
to the nearest whole trip.)
a. How many round trips is Michael currently flying, and how many round trips are needed to break even?
6 per week × 52 weeks) ---------------------------- 312
Revenue per trip ($360 x 4 passengers) ----------------- $1,440
Total revenue ($1,440 per trip x 312 trips)------------------ $449,280
Variable costs:
Fuel ------------------------------------------------- $147,976
Maintenance ------------------------------------------- 127,920
Total variable costs ---------------------------------------- $275,896
Variable costs per trip ($275,896 ÷ 312) -------------------------- $884.28
Contribution margin per trip ($1,440 $884.28) ------------------- $555.72
Fixed costs:
Salary ------------------------ $ 70,000
Depreciation of plane ---------------- 25,000
Depreciation of office equipment ---------- 2,800
Rent --------------------------- 40,000
Insurance ----------------------- 20,000
Miscellaneous ---------------------- 7,500
Total fixed costs ------------------------------ $165,300
Breakeven number of trips is ($165,300 ÷ $555.72) = 297 trips.
b. How many round trips are needed so that Micheal can draw a salary of $110,000 and still not show loss?
the breakeven number of trips is ($205,300 ÷ $555.72)=369
c. What is the average before tax profit of a round trip flight in 2010?
average before tax profit per round trip = $8,084 ÷ 312 = $25.91.
d. What is the incremental profit associated with adding a round trip flight?
$555.72.
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