Question

Global Freightways is considering the purchase of a new airplane to fly between Tokyo (NRT) and Singapore (SIN), a distance of 2,869 nautical miles. Global Freightways is evaluating two models of aircraft: the Boeing 747-400, which can safely carry 124 tons of freight and the slightly smaller Boeing 777, with an effective capacity of 104 tons. Costs associated with each:

aircraft	monthly fixed debt payment	Other Monthly Fixed Expenses	operating cost per ton/mile
boeing 747-400	$1,367,000	$50,000	$1.45
boeing 777	$1,517,000	$50,000	$1.38

Global Freightways can earn $2 revenue per ton/mile on this route, and expects to fly this plane loaded in both directions between SIN and NRT.

a. What does a break-even analysis indicate about the two choices of aircraft? It is tempting to say the Boeing 777 ‘has a lower break-even point’, but that is a dangerous statement considering that the Boeing 777 is a smaller aircraft.
b. Assuming Global loads each aircraft to its effective capacity, compute the adjusted break-even points to reflect that

* Remember that the 747-400 can safely carry 124 tons of freight and the slightly smaller Boeing 777 has an effective capacity of 104 tons.

Answer 1

a) Break even point

	Boeing 747-400	Boeing 777
Revenue Per ton / mile	$                     2.00	$                     2.00
Less: Operating cost per ton/ mile	$                     1.45	$                     1.38
Contribution per ton/mile	$                     0.55	$                     0.62
Fixed Expenses monthly	$          50,000.00	$          50,000.00
Monthly fixed debt payment	$    1,367,000.00	$    1,517,000.00
Total fixed payments	$    1,417,000.00	$    1,567,000.00
Break even point Sales per month (Total fixed payments / contribution)	$    2,576,363.64	$    2,527,419.35

From above calculations it can be observed that breajk even point is less for Being 777.

b) On assuming global loads,

	Boeing 747-400	Boeing 777
NO. of tons capacity	124	104
No. of miles travelled per trip	2,869	2,869
No of trips per day	2	2
No of days in month (Assumed)	30	30
No of per ton / miles in a month	21,345,360	17,902,560
Contribution per ton/mile	$                     0.55	$                     0.62
Total Contribution	$ 11,739,948.00	$ 11,099,587.20
Fixed Expenses monthly	$          50,000.00	$          50,000.00
Monthly fixed debt payment	$    1,367,000.00	$    1,517,000.00
Total fixed payments	$    1,417,000.00	$    1,567,000.00
Net Income	$ 10,322,948.00	$    9,532,587.20
Break even % of total capacity (Total fixed payments / Total contribution)	12.07%	14.12%

From above it can be observed that the break even % of total capacity is lower for Boeing 747-400 and in turn it gives higher contribution as well as net income than boeing 777 since its capacity is higher and can carry safely.

Thank you.