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 40 customers (with a standard deviation of 26) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $140. 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 $270. 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?

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 40 customers (with a standard deviation of 26) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $140. 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 $270. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost.

Explanation / Answer

Optimum Service level = Cu / Co+Cu

=$140/$270+$140

=0.3414

Using excel formula NORMSINV(0.3414) is -0.40865, negative value stated that over book will be less than 40

The actual value is -0.40865, * 26=10.62 or rounder to11

The hotel over booked by 11seats

Cu=Cost of Under estimate

Co=Cost of Over estimate

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