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 $14,000     Snacks and drinks 800     Landing fees 2,000     Supplies and forms 1,200 18,000 Contribution margin 30,000 Fixed costs     Depreciation 3,000     Salaries 15,000     Advertising 500     Airport hanger fees 1,750 20,250 Net income $9,750

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

Solution-

a) Break even point (dollar sales) = Fixed expenses / Contribution margin ratio

   = $20250 / 62.5%

= $32400

Contribution margin ratio = Contribution margin / sales

= $30000 / $48000

= 0.625 or 62.5%

b) Break even point (unit sales) = Fixed expenses / contribution margin per unit

= $20250 / $75

= 270 flights

Contribution margin per unit = $30000 / 400

= $75

c) At break even point , contribution margin = fixed expenses

So, Contribution margin = $20250

d)

1) Unit Ticket price = $48000 / 400 = $120

If ticket price were decreased by 10% then , new ticket price = $120 * 90% = $108

If passenger flights increased by 25% then ,new number of passenger flights = 400 * 125% = 500

New total variable cost = $18000 * 125% = $22500

Net income = [ (500 * $108) - $22500 - $20250 ]

= $11250

Therefore, net income increased to $11250

2) If ticket price decreased by 10% then new net income will be increased to $11250 , which is greater than previous net income. So, the ticket price decrease should be adopted .

Ans :- Yes.