Question

The Wall Street Journal presented data suggesting that United Airlines was not covering its costs on flights from San Francisco to Washington D.C,. The article quoted analysts saying that United should discontinue this service. The costs per flight included the costs of fuel, pilots, attendants, food, etc. used on the flights. They also included shared costs associated with running the hubs at the two airports, such as ticket agents, building charges, baggage handlers, gate charges, etc. Suppose that the revenue collected on the typical United flight from San Francisco to Washington does not cover the costs. Does this fact imply that United should discontinue these flights? What could we learn from this case of study?

PLEASE ANSWER BELOW QUESTIONS...…………………………………. THANKS

Hints: 1) discuss the differences between fixed costs and variable costs and how they could affect our decision-making.

2) How would consumers react if United airlines discontinued the service?

Answer 1

Let me answer the questions one by one.

1. Differences between Fixed costs and Variable costs

• Fixed costs are costs that remains same, without regarding the volume of production whereas variable cost changes with the level of production.
• Fixed costs are time related whereas variable costs are volume related.
• Fixed costs are required to be paid whether there is production or not. Variable costs only occur when there is production.
• Fixed production is considered to be a combination of fixed production overhead, fixed selling and distribution overhead, and fixed administration overhead. Variable cost is combination of direct material, direct expenses, direct labour, variable selling and distribution overhead, variable production overhead.
• Variable costs will remain same per unit while fixed cost per unit will change. In case of large production, per unit fixed cost decrease and vice versa.
• Examples of fixed costs are: rent, depreciation, insurance, salary, tax etc. and examples of variable costs are: wages, material consumed, packaging expenses, commission on sales etc.

2. How would consumers react if United airlines discontinued the service?

The above situation will affect consumers very badly as it will reduce a service from San Francisco to Washington D.C. No firm or organisation will be willing to run by incurring losses. In the case of United Airlines, they were even unable to cover their expenses efficiently. In this case usually any firm will think about cancelling such services. There may be regular customers of this airlines. They will be affected so badly.