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 24 customers (with a standard deviation of 13) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $105. 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 $215. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost.

Explanation / Answer

The cost of underestimating the number of cancellation is $128 and cost of overestimating cancellation is $230 Cu = $105 Co = $215 P Cu / Cu + Co P 105/220 P 0.477 Z Value at above probability = -0.057 Seats to overbook = Mean + Z Value * SD = 24 + 13*-0.057 = 23.259 Super Discount should overbook 23 passengers on the flight.

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