Question 3 Second City Airlines owns one aircraft (capacity =120 passengers) and

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Question 3

Second City Airlines owns one aircraft (capacity =120 passengers) and can operate 20 scheduled one-way flights between NewYork City and Pittsburgh each week. It charges a fixed one-way fare of $150 per passenger. Fuel and other flight-related costs are $5,000 per one-way flight. On-flight meal costs are $11 per passenger. Sales commissions averaging 6% of fare are paid to travel agents. Flying crew, ground crew, advertising and other administrative costs amount to $210,000 each week.

A.) Assuming that Second City has decided to operate 20 one-way flights, how many passengers must each of the one-way flights have on average to make a total after-tax profit of $20,000 per week? Assume that the income tax rate is 35%.

Solution to question A:

Costs that vary with number of passengers:

Meals and refreshments = $11

X = number of passengers needed to break even each week

Total revenue per week – costs per passenger per week – costs per flight per week – fixed costs per week = profit per week

($120 x X x 20) – ($11 x X x 20) – ( $5,000 x 20 ) – $210,000 = $0

$2,180X = $310,000

X = $310,000 ÷ $2,180 = 142.20 (i.e., 142 passengers per flight)

B.) REQUIRED (pls. provide answer for parf B only)

Assuming that Second City has not yet decided on the number of flights and that all the scheduled flights will be 90% full, how many one-way flights must they operate on this route to make the same profit as in A?

Costs that vary with number of passengers:

Meals and refreshments = $11

X = number of passengers needed to break even each week

Total revenue per week – costs per passenger per week – costs per flight per week – fixed costs per week = profit per week

($120 x X x 20) – ($11 x X x 20) – ( $5,000 x 20 ) – $210,000 = $0

$2,180X = $310,000

X = $310,000 ÷ $2,180 = 142.20 (i.e., 142 passengers per flight)

Explanation / Answer

Required after-tax profit = $20,000
Tax rate = 35%
Profit before tax = ($20,000/65)*100 = $30,769.23

Passengers per flight = 90% x 120 = 108
On-flight meal cost per flight = 108 x $11 = $1,188
Fuel and other flight-related costs per flight = $5,000
Sales commission per flight = (6% x $150) x 108 = $972
Fixed Cost per week = $210,000

Let’s assume “n” number of flights required to achieve the profit:

Total revenue per week – On-flight meal cost per week – Fuel and other flight-related costs per week - Sales commission per – fixed costs per week = profit per week

($150 x 108 x “n”) – ($1,188 x “n”) – ($5,000 x “n”) – ($972 x “n”) – ($210,000) = $30,769.23

$9,040 x “n” = ($30,769.23 + $210,000)

“n” = ($30,769.23 + $210,000) / $9,040

“n” = 26.63 or 27 flights

So, to achieve the same profit, Second city must operate 27 one-way flight.

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