Problem:
Regional 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 Regional's base airport to the major city in the state, Metropolis. Each month 40 round-trip flights are made. Shown on page 219 is a recent month's activity in the form of a cost-volume-profit income statement.
Fare revenues (300 fares) $45,000
Variable costs
Fuel $14,000
Snacks and drinks 800
Landing fees 2,000
Supplies and forms 1,200 18,000
Contribution margin 27,000
Fixed costs
Depreciation 3,000
Salaries 15,000
Advertising 500
Airport hanger fees 1,750 20,250
Net income $ 6,750
Instructions
(a) Calculate the break-even point in (1) dollars and (2) number of fares.
Per Fare
$45,000/ 300 fares = $150 a fare
Fuel = 46.67
Snacks = 2.67
Landing Fees = 6.67
Supplies = 4
Total Var. Costs $60.01
1.
Contribution margin per unit = Unit selling price- Unit variable costs
89.99 = $150 - 60.01
Contribution margin ratio= Contribution margin per unit / Unit selling price
60% =89.99 / 150
Break-even point in dollars= Fixed cost / Contribution margin ratio
33,750=20,250 / .60
2.
Sales-Variable costs+Fixed costs+Net income
150Q - 60.01Q + 20,250 + 0
89.99Q - 20,250
Q = 225.03 units
(b) Without calculations, determine the contribution margin at the break-even point.
(c) If fares were decreased by 10%, an additional 100 fares could be generated. However, variable costs would increase by 35%. Should the fare decrease be adopted?