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	$7,000
Flight crew salaries	3,200
Airplane depreciation	3,480
Variable cost per passenger—business class	140
Variable cost per passenger—economy class	120
Round-trip ticket price—business class	800
Round-trip ticket price—economy class	300

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.

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

Total number of seats at break-even

seats

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

Business class seats at break-even	seats
Economy class seats at break-even	seats

Answer 1

(a) Computation of the break-even number of seats sold on a single round-trip flight for the overall enterprise product,

Unit contribution margin of overall product

Unit selling price of E [(10% × $800) + (90% × $300)]                       $ 350

Unit variable cost of E [(10% × $140) + (90% × $120)]                       $ 122

Unit contribution margin of E $ 228

Fixed costs of the Seattle to San Diego round-trip flight:

Fuel                                                    $ 7000

Flight crew salaries $ 3200

Airplane depreciation $ 3480

Total fixed costs                              13,680

Break-even in sales (units) of overall product:

Break-Even Sales (units) = Fixed costs / Unit contribution margin

= $ 13,680 / $ 228

= 60 Seats

Total number of seats at break-even = 60 Seats                                                        

(b) Business class and economy class seats would be sold at the break-even point

Business class seats at break-even            = 6 seats (60 seats x 10%)

Economy class seats at break-even           = 54 seats (60 seats x 90%)