Question

An airline maintains a daily schedule between San Francisco and Honolulu. The airplanes used for this route have a seating capacity of 180. The fixed cost of making a one-way flight between the two cities is $8,000. It includes the cost of gasoline, wages, landing fees, and other lump sum expenses connected with the flight, but it does not include the general overhead expenses of the airline. The average ticket price is $120. The unit variable cost is $20, which includes the cost of a meal, drinks, refreshments, etc. a) What is the break even volume for the flight? b) If the total fixed cost increases by $2,000, what will happen to the break-even volume? c) Assuming fixed costs are still $8,000, what is the effect of a $10 increase in ticket price? d) If demand is = 400 - 2p (where p is the average ticket price), what average ticket price will maximize profits, and what is the net profit at this point?

Answer 1

Question A

Break Even Volume = Fixed Costs / Contribution Margin per Ticket

Contribution Margin per Ticket = Selling Price per Ticket - Variable Costs per Ticket

Selling Price per Ticket = $ 120

Variable Costs per Ticket = $ 20

Contribution Margin per Ticket = 120 - 20 = $ 100

Fixed Costs = $ 8,000

Break Even Point in Tickets = 8,000 / 100

Break Even Point in Tickets = 80 Tickets

Question B

Break Even Volume = Fixed Costs / Contribution Margin per Ticket

Contribution Margin per Ticket = Selling Price per Ticket - Variable Costs per Ticket

Selling Price per Ticket = $ 120

Variable Costs per Ticket = $ 20

Contribution Margin per Ticket = 120 - 20 = $ 100

Fixed Costs = $ 10,000 ($ 8,000 + Increment of $ 2,000)

Break Even Point in Tickets = 10,000 / 100

Break Even Point in Tickets = 100 Tickets

If the Fixed Cost are increased by $ 2,000 then Break Even Volume also increase by 20 More Tickets to be sold.

Question C

Break Even Volume = Fixed Costs / Contribution Margin per Ticket

Contribution Margin per Ticket = Selling Price per Ticket - Variable Costs per Ticket

Selling Price per Ticket = $ 130 ($ 120 + Increase of $ 10 per Ticket)

Variable Costs per Ticket = $ 20

Contribution Margin per Ticket = 130 - 20 = $ 110

Fixed Costs = $ 8,000

Break Even Point in Tickets = 8,000 / 110

Break Even Point in Tickets = 73 Tickets

If the Selling Price of Ticket is increased by $ 10 the the Break Even Units will reduce by 7 Tickets which means there are 7 Less Tickets to be sold to reach Break Even.

Question D

Demand = 400 - 2P

Average Ticket Price = $ 120 which stands for P

Then Demand = 400 - 2 * 120

Demand = 400 - 240 = 160 Tickets

Average Price of $ 130 per Ticket will maximise the profits.

Net Profit at this Point = Contribution Margin per Ticket * 160 Tickets - Fixed Costs

Fixed Costs = $ 8,000

Contribution Margin per Ticket using $ 130 as Selling Price = $ 110

Net Profit at this Point = (110 * 160) - 8,000

Net Profit at this Point = $ 9,600