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 hangar fees 1,750 20,250
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?