Question

Exercise 6-4 Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi’s base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month’s activity in the form of a cost-volume-profit income statement. Fare revenues (400 passenger flights) $48,000 Variable costs     Fuel $17,040     Snacks and drinks 780     Landing fees 2,100     Supplies and forms 1,200 21,120 Contribution margin 26,880 Fixed costs     Depreciation 3,050     Salaries 11,900     Advertising 300     Airport hanger fees 1,550 16,800 Net income $10,080

Calculate the break-even point in dollars. Break-even point $ LINK TO TEXT

Calculate the break-even point in number of passenger flights. Break-even point flights LINK TO TEXT

Without calculations, determine the contribution margin at the break-even point. Break-even point $ LINK TO TEXT

If ticket prices were decreased by 10%, passenger flights would increase by 25%. However, total variable costs would increase by the same percentage as passenger flights. (1) How much would net income be impacted by this change? Net income increasesdecreases to $ (2) Should the ticket price decrease be adopted? NoYes

Answer 1

1	Break-even point in dollars.	$30,000
	(Fixed cost/Contribution margin ratio)
	[16,800/(26,880/48,000)]
2	Break-even point in the number of passenger flights.	250
	(Fixed cost/Contribution margin per passenger flights)
	[16,800/(26,880/400)]
3	Contribution margin at the break-even point	16,800
	(250 x $67.20)
4 (1)	Net income increases to $720
	Fare revenues (500 passenger flights x $108)		54,000
	Variable costs
	Fuel (17,040*500/400)	21,300
	Snacks and drinks (780*500/400)	975
	Landing fees (2,100*500/400)	2,625
	Supplies and forms (1,200*500/400)	1,500	26,400
	Contribution margin		27,600
	Fixed costs
	Depreciation	3,050
	Salaries	11,900
	Advertising	300
	Airport hanger fees	1,550	16,800
	Net income		10,800
(2)	Yes