Solve the below problem:
At the time of writing, Burt Rutan and Sir Rich- ard Branson had teamed up to form The Space- ship Company, which will develop and manu- facture commercial spacecraft (SpaceShipTwo, or SS2), launch aircraft (WhiteKnightTwo, or WK2), and support equipment. Branson's "spaceline," Virgin Galactic, will handle the operations for space tourist flights. Their hope is to eventually reduce by half the proposed initial ticket price of $190,000.
No information has been released about development and operating costs for the spaceline and equipment, so the figures used in this case are guesses. Refer to Example for hypothetical life cycle costs for the spaceline and spaceship fleet, but assume the following changes to the numbers:
Example: Life Cycle Costs for an Operational Fleet of Spaceships
(This illustration extends on previous SpaceShipOne examples, but the numbers are purely hypothetical.)
Having gained experience from SpaceShipOne, a larger spaceship and moth- ership are to be designed. The new spaceship will carry a pilot plus four paying passengers, go as high as 120km, and be capable of 20 flights per year over an operational life of 5 years. The cost of developing and producing four of these spaceships and two motherships is estimated at $80 million. Meantime, a survey indicates that the number of people worldwide willing to pay the $190,000 ticket price to fly on these spaceships is at least 1,000 per year.
A "spaceline" that will use and maintain the spaceships is being created for a start-up cost of $10 million. Operational costs for the spaceline comprise two parts: annual costs for ground operations (reservations, personnel, ground facili- ties, etc.), and per-flight costs for flight operations (fuel, parts, repairs, etc., for the spaceship and the mothership). Ground operations costs are placed at $2 million/year, and per-flight costs at $0.4 million/flight. (These costs are assumed to be constant for every year and flight, respectively, although realistically they would vary up or down on depending on inflation, the learning curve, efficiencies, and economies of scale as more spaceships are added to the fleet. Annual rev- enues are assumed constant too, though realistically they would start out small and then grow until the full fleet of spaceships is operational). Given these costs and ignoring other factors (e.g., time value of money), what is the LCC for the venture?
Assumptions
Four spaceships @ 20 flights/year each = 80 flights/year (320 passengers/year, which lies well within the estimated annual demand). Five years of operation.
• Five spaceships, seven passengers per spaceship
• Development and manufacturing costs, $120 million
• Flight operations cost: $0.5 million/flight
• Ticket price: $190,000 for passengers on the first 100 flights, then $150,000 for passengers on the next 100, and $100,000 for passengers on flights thereafter.
QUESTIONS
1. Assuming all other numbers from Example 8.2 are the same, what is the "bottom line" profit of the venture for 5 years of operation?
2. If the profit goal is $70 million:
a. What is the maximum development and production cost for the fleet?
b. What is the maximum per-flight opera-tional cost?
3. Brainstorm. What are some ways that the development cost might be reduced? What are some possible design decisions for the spacecraft and mothership that would reduce the per-flight operational cost? Next, research articles and news releases about SS2 and WK2 to see what the developers, Scaled Compos- ites and The Spaceship Company, have been doing to contain costs.