Question

Product Costing and Decision Analysis for a Service Company

Blue Star Airline provides passenger airline service, using small jets. The airline connects four major cities: Charlotte, Pittsburgh, Detroit, and San Francisco. The company expects to fly 170,000 miles during a month. The following costs are budgeted for a month:

Fuel	$2,120,000
Ground personnel	788,500
Crew salaries	850,000
Depreciation	430,000
Total costs	$4,188,500

Blue Star management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs:

Airline Cost	Activity Base
Fuel, crew, and depreciation costs	Number of miles flown
Ground personnel	Number of arrivals and departures at an airport

The size of the company's ground operation in each city is determined by the size of the workforce. The following monthly data are available from corporate records for each terminal operation: Show work notes

Terminal City			Ground Personnel Cost				Number of Arrivals/Departures
Charlotte				$256,000				320
Pittsburgh				97,500				130
Detroit				129,000				150
San Francisco				306,000				340
	Total			$788,500				940

Three recent representative flights have been selected for the profitability study. Their characteristics are as follows:

	Description	Miles Flown		Number of Passengers		Ticket Price per Passenger
Flight 101	Charlotte to San Francisco	2,000		80		$695.00
Flight 102	Detroit to Charlotte	800		50		441.50
Flight 103	Charlotte to Pittsburgh	400		20		382.00

Required:

1. Determine the fuel, crew, and depreciation cost per mile flown.
$ per mile

2. Determine the cost per arrival or departure by terminal city.

Charlotte	$
Pittsburgh	$
Detroit	$
San Francisco	$

3. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs.

Blue Star Airline
Flight Profitability Report
For Three Representative Flights
	Flight 101	Flight 102	Flight 103
Passenger revenue	$	$	$
Fuel, crew, and depreciation costs	$	$	$
Ground personnel
Total costs	$	$	$
Flight operating income (loss)	$	$	$

Answer 1

1.Fuel, crew and Depreciation cost per mile = Total cost/Total miles

= (2,120,000+850,000+430,000)/170,000

= $20 per mile flown

2.Cost per arrival/Departure = Cost/Number of arrivals and departures

Charlotte = 256000/320 = $800 per arrival/departure

Pittsburgh = 97500/130 = $750

Detroit = 129000/150 = 860

San Francisco = 306000/340 = 900

Blue Star Airline
Flight Profitability Report
For Three Representative Flights
	Flight 101	Flight 102	Flight 103
Passenger revenue	55,600	22,075	7,640
Fuel, crew, and depreciation costs	40,000	16,000	8,000
Ground personnel	136,000	83,000	31,000
Total costs	176,000	99,000	39,000
Flight operating income (loss)	(120,400)	(76,925)	(31,360)