Cost Accounting-Breakeven problem

Question

Universal Airlines is considering a proposal to initiate air service between Phoenix, Arizona and Las Vegas, Nevada. The route would be designed primarily to serve the recreation and tourist travelers that frequently travel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Universal on this route.

In addition, the airline expects to attract business travelers during the hours of 7 AM. to 6 PM. on Mondays through Fridays. The fare price schedule or tariff would be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of $100 one way during business hours and a fare of $60 for all other hours would result in the passenger load being equal during business-travel and tourist-travel hours.

To operate the route, the airline would need two 200-passenger jet aircraft. The aircraft would be leased at an annual cost of $10,000,000 each. Other fixed costs for ground service would amount to $ 500,000 per year. Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately $800 per hour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $1000 per hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45 minutes each way.

The costs associated with processing each passenger amount to $5. This includes ticket processing, agent commissions, and variable costs of baggage handling. Food and beverage service cost $10 per passenger and will be offered at no charge on flights during business hours. The cost of this service on non-business hour flights is expected to be recovered through charges levied for alcoholic beverages.



Required:

1 If six business flights and four tourist flights are offered each way every weekday, and twelve tourist flights are offered each way every Saturday and Sunday, what is the average number of passengers that must be carried on each flight to break even? What is the breakeven load factor or percentage of available seats occupied on a route?

2. If Universal Airlines operates the Phoenix—Las Vegas route, its aircraft on that route will be idle between midnight and 6 A.M. The airline is considering offering a “Red Die” special, which would leave Phoenix daily at midnight and return by 6 A.M. The marketing division estimates that if the fare were no more than $40, the load factor will be 50% for each “Red Die” flight. Operating costs would be at the same rate for this flight, but advertising costs of $10000 per week would be required for promotion of the service. No food or beverage costs would be borne by the company. Management wishes to know the minimum fare that would be required to break even on the “Red Die” special assuming the marketing division’s passenger estimates are correct.

Answer

Part 1.
Flying Time - Weekdays
Business - 6 flights x 2 way x 5 days x 45 minutes = 2700 minutes
Tourist - 4 flights x 2 way x 5 days x 45 minutes = 1800 minutes

Flying Time - Weekends
Tourist - 12 flights x 2 way x 2 days x 45 minutes = 2160 minutes
---------------
Total : 6660 minutes

6660 minutes/60 = 111 hours per week or 5772 hours per year (111 hours x 52 weeks)


FIXED COST
Lease : 10,000,000 x 2 flights 20,000,000
+ Ground Service : 5,000,000
Total 25,000,000

VARIABLE COST
Salaries $ 800 x 5772 hours = $4617600
Fuel Cost $ 1000 x 5772 hours = $5772000
Total : $ 10389600

Ticket Processing cost
12 flights x 5 days x 52 weeks x $5 = $15600
8 flights x 5 days x 52 weeks x $5 = $10400
24 flights x 2 days x 52 weeks x $5 = $12480
Total $38480

Food and beverages service
12 flights x 5 days x 52 weeks x $10 = $31200


SALES
12 business flights x 5 days x Y number of passengers x 52 weeks x $100 = 312000 Y
8 business flights x 5 days x Y number of passengers x 52 weeks x $60 = 124800 Y
24 business flights x 5 days x Y number of passengers x 52 weeks x $60 = 149760 Y
Total = 586560 Y

At Break Even Point
Sales = Fixed Cost + Variable Cost

586560 Y = 25000000 + 10389600 + 38480Y + 31200Y
or Y = 69 Passengers to Breakeven

Part 2
Breakeven Load Factor : 69/200 x 100 = 34.5%

Part 3
Load Factor 50% i.e. 100 passengers per flight

Time - 2 flights x 7 days x 45 minutes = 630 minutes/60 = 10.5 hours

Sales = 2 flights x 7 days x 45 minutes x $Y fare = 1400Y

1400Y = 35900 Hours

Y = 35900/1400 = $ 25.64