to good dcC 13.22 Southeastern Airlines\'s daily flight from At m, Charlotte use
ID: 357418 • Letter: T
Question
to good dcC 13.22 Southeastern Airlines's daily flight from At m, Charlotte uses a Boeing 737, with all-coach seating for 120 er In the past, the airline has priced every seat at $140 for the De n way flight. An average of 80 passengers are on each flight T r variable cost of a filled seat is $25. Katie Morgan, the new opera- e tions manager, has decided to try a yield revenue approach, with seats priced at $80 for early bookings and at $190 for bookin within 1 week of the flight. She estimates that the airline will sell 65 seats at the lower price and 35 at the higher price. Variable will not change. Which approach is preferable to Ms. Morgan?Explanation / Answer
APPROACH 1
Average number of passengers on each flight = 80
Price of each seat = $140
Variable cost per seat = $25
Profit per seat = Price per seat - Variable cost per seat
= 140 - 25 = $115
Profit from all the filled seats = Number of seats filled * Profit per seat
= 80 * 115 = $9200
APPROACH 2
Price for early bookings = $80
Number of estimated seats that the airline will sell for a lower price = 65
Profit per seat = Price per seat - Variable cost per seat
= 80 - 25 =$55
Profit from all the filled seats = Number of seats filled * Profit per seat
= 65 * 55 = $3575
Price for late bookings = $190
Number of estimated seats that the airline will sell for a higher price = 35
Profit per seat = Price per seat - Variable cost per seat
= 190 - 25 =$165
Profit from all the filled seats = Number of seats filled * Profit per seat
= 35 * 165 = $5775
Total profit from APPROACH 2 is the sum of the profits from the lower priced seats and the higher priced seats.
= $3575 + $5775
=$9350
The operations manager should thus adopt the second approach as it would yield a greater profit of $9350
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