Questions:
Reliable Airlines is a small local carrier in the Midwest. All seats are coach and the following data are available.
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Number of seats per plane
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120
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Average load factor (percentage of seats filled)
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75%
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Average full passenger fare
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$70
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Average variable cost per passenger
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$30
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Fixed operating costs per month
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$1,200,000
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a. What is break-even point in passengers and revenues?
b. What is break-even point in number of flights?
c. If Reliable raises its average full passenger fare to $85, it is estimated that the load factor will decrease to 60 percent. What will be the break-even point in number of flights?
d. The cost of fuel is a significant variable cost to any airline. If fuel charges increase by $8 per barrel, it is estimated that variable cost per passenger will rise to $40. In this case, what would be the new break-even point in passengers and in number of flights? (Refer back to original data.)
e. Reliable has experienced an increase in variable cost per passenger to $35
and an increase in total fixed costs to $1,500,000. The company has decided to raise the average fare to $80. What number of passengers is needed to generate an after-tax profit of $400,000 if the tax rate is 40 percent?
f. (Use original data.) Reliable is considering offering a discounted fare of $50, which the company feels would increase the load factor to 80 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising costs would be $80,000. How much pretax income would the discounted fare provide Reliable if the company has 40 flights per day, 30 days per month?
g. Reliable has an opportunity to obtain a new route. The company feels it can sell seats at $75 on the route, but the load factor would be only 60 percent. The company would fly the route 15 times per month. The increase in fixed costs for additional crew, additional planes, landing fees, maintenance, etc., would total $100,000 per month. Variable cost per passenger would remain at $30.
1. Should the company obtain the route?
2. How many flights would Reliable need to earn pretax income of $50,500 per month on this route?
3. If the load factor could be increased to 75 percent, how many flights would be needed to earn pretax income of $50,500 per month on this route?
4. What qualitative factors should be considered by Reliable in making its decision about acquiring this route?