Problem
Jim Wright, Worldwide Airway's vice president for operations, has been approached by Japanese Tourist Agency about flying chartered tourist flights from Japan to Hawaii. The tourist agency has offered Worldwide Airways $150,000 per round-trip flight on a jumbo jet. Given the airline's usual occupancy rate and air fares, a round-trip jumbo jet flight between Japan and Hawaii typically brings in revenues of $250,000 per round-trip flight. Thus, the tourist agency's specially priced offer requires a special analysis by Jim Wright.
Wright knows that Worldwide Airways has two jumbo jets that are not currently being used. The airline has just eliminated several unprofitable routes, freeing these aircraft for other uses. The airline was not currently planning to add any routes and, therefore, the two jets are idle. To help Wright make a decision regarding the Japanese Tourist Agency offer, he obtains the following information from his company's management accountant:
Revenues:
Passengers $250,000
Cargo 30,000
Total Revenues $280,000
Expenses:
Variable expenses of flight $90,000
Fixed costs attached to the flight $100,000
Total Expenses $190,000
Net Income Per Flight $90,000
Note: The variable expenses cover aircraft fuel and maintenance, flight crew costs, in-flight meals and services, and landing fees. The fixed costs allocated to each flight cover Worldwide Airways' fixed costs such as aircraft depreciation, maintenance and depreciation of facilities, and fixed administrative costs.
Also, the variable cost of the proposed Japanese flight would be $5,000 lower because there were no variable costs of reservations and ticketing.
1. Should Jim Wright accept Japanese Tourist Agency's offer of $150,000? EXPLAIN YOUR ANSWER FULLY. (A yes or no answer will not be given any credit).
1. Now consider how Wright's analysis would appear if Worldwide Airways had no idle aircraft. Suppose that in order to fly the charter between Japan and Hawaii, the airline would have to cancel its least profitable route, which is between Japan and Hong Kong. This route contributes $80,000 toward covering the airline's fixed costs and profit. All other details remain the same.
Should Jim Wright accept Japanese Tourist Agency's offer under these conditions? EXPLAIN YOUR ANSWER FULLY. (A yes or no answer is not sufficient).
List 3 qualitative factors that Wright must make in accepting or rejecting the offer from the charter company.