Question

Scenic Flights provides 3 hour sightseeing flights over the Eastern Sea Board along the Greet Ocean Road near Lorne Victoria. The average flight has 20 passengers on board. Each passenger pays $300 for a 2 hour scenic flight. The business averages 90 flights each year based on current demand over the weekend – Saturday and / or Sunday dependent on demand. Each flight requires two pilots who are each paid $500 per flight and two flight attendants who receive $200 each per flight. Pilots and flight attendants are employed on a casual basis only receiving payment when flights operate. Other variable costs include: inflight passenger refreshments costing $30 per passenger and fuel which costs $800 per flight. Total annual fixed costs are $150,000.

Calculate income and variable costs and contribution margin of each scenic flight.

Calculate the number of scenic flights needed to break even.

Scenic Flights would like to increase current profits by 40 percent. Calculate the number of additional flights required to meet this financial goal.

Discuss whether this increased profit target is realistic under current conditions and possible assumptions and limitations of the “cost / volume / profit model” at such higher volume levels. (word limit 40)

Answer 1

Req 1.
Income per flight (20 passengers @ 300)					6000
Variable cost per flight:
Salaries to pilot (500*2)				1000
Slaries to attendents (200*2)				400
Passenger refereshment (20*30)				600
Fuel cst				800
Total variable cost per flight					2800
Contribution per flight (6000-2800)					3200
Req 2.
Total fixed cost			150000
Divide: CM per flight			3200
Break even flights			46.875
Req 3.
Contribution earned (3200*90)				288000
Less: fixed cost				150000
Net income				138000
Target increase in income (138000*40%)				55200
Divide: CM per flight				3200
Number of flights to be increased				17.25
Req 4.
As the firm is operating at 90 flights depending upon the demand,
however it might not be possible to increase the flights due to demand.
Moreover, the increased flight may need to increasse the installed capacity, which also increases the fixed cost.