Starting service to a new market, such as Havana, Cuba, is a major capital budge
ID: 2787708 • Letter: S
Question
Starting service to a new market, such as Havana, Cuba, is a major capital budgeting project for Southwest Airlines (ticker symbol: LUV). A project of this scale requires coordinated planning across all functions of a business that you are studying in your Integrated Core classes. Choose and discuss three items on the income statement and balance sheet that you think will be impacted by this new undertaking (a total of six items). Explain why you chose those particular items, and how those items are impacted by the marketing, management and operations decisions of the company.
Explanation / Answer
Three items in the income statement that will be impacted by this new undertaking are:
1. Revenue – This item of the income statement will increase as more passengers fly due to introduction of flight in the new route.
2. Cost of revenue – This item of the income statement will increase as introduction of new flights will entail costs like fuel expenses and will add to the amount being incurred before introduction of the new flight.
3. Sales, general and administrative expenses - This item of the income statement will increase as introduction of new flights will entail costs like marketing, administration and other general expenses.
Three items in the balance sheet that will be impacted by this new undertaking are:
1. Inventory – The airline company will be required to keep a higher level of inventory to service the new route.
2. Net receivables – This current account will also go up as the airline will sell more tickets through travel agents who are given a credit period.
3. Accounts payable – This current liability will also go up as the company will pay for its inventory etc. by taking credit from its suppliers.
The above six items will be directly impacted by the introduction of the new airline. As management decides to expand its operations and do extensive marketing of its new routes the absolute value of these line items will only rise further.
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