Question

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)				$64,000
Variable costs
Fuel		$21,440
Snacks and drinks		720
Landing fees		1,800
Supplies and forms		1,000		24,960
Contribution margin				39,040
Fixed costs
Depreciation		2,950
Salaries		14,470
Advertising		600
Airport hanger fees		1,500		19,520
Net income				$19,520

Calculate the break-even point in dollars.

Break-even point

$

eTextbook and Media

  

  

Calculate the break-even point in number of passenger flights.

Break-even point

flights

eTextbook and Media

  

  

Without calculations, determine the contribution margin at the break-even point.

Break-even point

$

eTextbook and Media

  

  

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

Answer;

Unit selling price = Sales Revenue / No. of Passenger Flights                                                                            = $64,000 / 400                                Selling price per unit = $160

Unit variable cost = Total variable costs / No. of Passenger Flights                                                                              = $24,960 / 400                             Variable cost per unit    = $62.40

Unit contribution margin = Selling price per unit (-) Variable price per unit                                                                                              =   $160 (-) $62.40                     Contribution margin per unit              = $97.60

1)

Contribution Margin ratio =   Contribution margin per unit/Selling price per unit                                                                                                  =   $97.60 / $160                                    Contribution Margin ratio        =   61%

Break even point in Dollars = Fixed Costs / Contribution Margin Ratio                                                                                                 =   $19,520 / 61%                       Break even point in Dollars                  = $32,000

2)

Break even point           = Fixed costs/Unit contribution margin                                                                                              = $19,520 / $97.60 Break-even point in number of passenger flights = 200 flights

3)

Contribution margin at break even point = $19,520 (Since at Break even point, contribution margin is equals to fixed cost

4)1.

Unit selling price = $160 per unit * (1-10%) = $144

Unit contribution margin = $144 (-) $62.40                              = $81.60

No. of Passenger flights   =   400*1.25                                      = 500

Net income = (Unit cntribution Margin X No. of passenger Flights) - Fixed Costs                                                                                        =   (500* $81.60)- $19,520                                                                                        = $21,280

Net income increases to $21,280

4)2

Yes, The ticket price drop should be adopted