Computation of Break-even-point of Airline Company.
The Smooth Flight Airline Company is considering lowering fares in an attempt to fill unused seats on its regular flights from New York to Chicago. Current capacity on each flight is 250 passengers. At present, the company sells an average of 130 tickets at $330 per ticket, but estimates that an additional 100 tickets could be sold if it offered a stand-by ticket price of $140 on the day of the flight. Fixed costs per flight are $50,000 and variable costs per ticket are $25.
1. Prepare a direct costing (variable) income statement to show the current profit or loss for each flight at the current level of 130 tickets sold per flight.
2. Prepare a direct costing (Variable) income statement to show the change in profits if the proposed stand-by plan is put into effect.
3. How many tickets must be sold at the $330 price to cover fixed costs?
4. How many tickets must be sold at the $140 price to cover fixed costs, assuming all tickets are at that price?
5. Would you recommend that management adopt the stand-by ticket? WHY OR WHY NOT?