Next week, Super Discount Airlines has a flight from New York to Los Angeles tha

Question

Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. The airline knows from past history that an average of 21 customers (with a standard deviation of 12) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $126. If the flight is overbooked, the airline has a policy of getting the customer on the next available flight and giving the person a free round-trip ticket on a future flight. The cost of this free round-trip ticket averages $216. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost. By how many seats should Super Discount overbook the flight? (Use Excel's NORMSINV0 function to find the correct critical value for the given a-level. Do not round intermediate calculations. Round your answer to the nearest whole number.) Overbooked by passengers

Explanation / Answer

1)

Cost of shortage (Cs) = Revenue from ticket = 126

Cost of excess (Ce) = Sunk cost = 216

Service level = Cs/(Cs+Ce) = 126/(126+216) = 0.3684

z value for Service level 0.3684 is -0.3360

Optimum level of overbook = Mean + z*Service level = 21 + (-0.3360)*12 = 16.97

Hence, 17 seats can be over booked

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