Evaluate the cost of free round-trip flight


Discuss the below problem:

Q: A popular Cheap-Ticket flight from New York (LGA) to Dallas (DFW) costs $120. From the past history, the airline knows that an average of 10 customers (with standard deviation of 4) cancel their reservation. If the flight is overbooked, the airline has a policy to board customer on the next available flight and give the person a free round-trip ticket on a future flight. The cost of free round-trip flight averages $180. By how many should this ‘Cheap-Ticket' airline overbook the flight (sale extra ticket)?

Step 1: Find the P-value (probability):

Step 2: Find Z-value [Use Excel NORMSINV( P-value)]

Step 3: Find X-value (µ and s known) from the equation: z=(X-µ)/s

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Accounting Basics: Evaluate the cost of free round-trip flight
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