Question

Break-Even Sales and Sales Mix for a Service Company

Zero Turbulence Airline provides air transportation services between Los Angeles, California; and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:

Fuel $8,258

Flight crew salaries 6,325

Airplane depreciation 2,987

Variable cost per passenger—business class 40

Variable cost per passenger—economy class 30

Round-trip ticket price—business class 570

Round-trip ticket price—economy class 250

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. If required round the answers to nearest whole number.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall product, E. Assume that the overall product is 10% business class and 90% economy class seats. Total number of seats at break-even?

b. How many business class and economy class seats would be sold at the break-even point?

Business class seats at break-even?

Economy class seats at break-even?

Answer 1

	Answer:
	Total Fixed costs         =   Fuel + Flight crew salaries + Airplane depreciation         = $ 8,258 + $ 6,325 + $ 2,987	$ 17,570
Product	Contribution margin ( Ticket Price (-) variable Cost )	Contibution Ratio	Weighted Average contribution margin
Business class	$ 530 ( $ 570 (-) $ 40 )	10%	$ 53
Economy class	$ 220 ( $ 250 (-) $ 30 )	90%	$ 198
	Weighted Average contribution margin	=	$ 251
(a)	Total number of seats at break-even           = Total Fixed costs / Wg. Avg. contribution margin           =   $ 17,570 / $ 251	70 Seats
(b)	Business class seats at break-even     = Number of seats at break-even x Contibution ratio     = 70 x 10%	7 Seats
	Economy class seats at break-even     = Number of seats at break-even x Contibution ratio     = 70 x 90%	63 Seats