Question

Suppose a particular charter Airline has annual fixed costs of $3.2 million for its One B777 Aircraft (capacity of 400 seat)-that operates daily flights between Dubai (DXB) and Muscat (MCT). The average ticket fare per seat is $50, and average seat variable operating costs of $10 for each seat sold. The charter Airline operates daily all year long (365 days per year)?   

• 1.         Calculate the net income the charter airline will generate if:
• a)         All the seats are filled throughout the year;
• b)         Half the seats are filled throughout the year.
• 2.         Compute the break-even point in number of seats sold. What percentage load factor for the year is needed to break even?

Answer 1

1.Computation of Net income:

a) When all Seats are filled

No.of seats = 400

When half seats are filled = 400/2=200

Particulars	Fare per seat	a) Number of seats=400 Total cost per year (Fare per seat*No.of 400 * 365days)	b) When half seats are filled Total cost per year (Fare per seat*No.of 200 * 365days)
Ticket fare / Sales price	$50	$7,300,000	$3,650,000
Less: Variable cost	(10)	(1,460,000)	( 730,000)
Contribution margin per seat	$40	$5,840,000	$2,920,000
Less: Fixed costs		($3,200,000)	($3,200,000)
Net Income/loss		$2,640,000	($280,000)

2) Computation of Break even seats to be sold:

Break even point(seats to be sold) = Fixed cost / Contribution margin per seat per year

=$3,200,000 /( $40*365)

=$3,200,000 /$14600

= 219.18

break-even point in number of seats sold = 219 seats

What percentage load factor for the year is needed to break even

= Break even seats to be sold/Total capacity of seats to be filled

= 219/400

=54.75%