Contribution approach, relevant costs. Air Frisco has leased a single jet aircraft that it operates between San Francisco and the Fijian Islands. Only tourist-class seats are available on its planes. An analyst has collected the following information:

Assume that fuel costs are unaffected by the actual number of passengers on a flight.

1. Calculate the total contribution margin from passengers that Air Frisco earns on each one-way flight between San Francisco and Fiji.

2. The Market Research Department of Air Frisco indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 212. On the basis of financial considerations alone, should Air Frisco lower its fare? Show your calculations.

3. Travel International, a tour operator, approaches Air Frisco with the possibility of chartering its air craft. The terms of charter are as follows: 

(a) For each one-way flight, Travel International will pay Air Frisco $74,500 to charter the plane and to use its flight crew and ground-service staff; 

(b) Travel International will pay for fuel costs; and 

(c) Travel International will pay for all food costs. On the basis of financial considerations alone, should Air Frisco accept Travel International’s offer? Show your calculations. What other factors should Air Frisco consider in deciding whether to charter its plane to Travel International?

Seating capacity per plane Average number of passengers per flight Average one-way fare Variable fuel costs Food and beverage service costs (no charge to passenger) Commission to travel agents paid by Air Frisco (all tickets are booked by travel agents) Fixed annual lease costs allocated to each flight Fixed ground-services (maintenance, check in, baggage handling) costs allocated to each flight Fixed flight-crew salaries allocated to each flight 360 passengers 200 passengers $500 $14,000 per flight S20 per passenger 8% of fare $53,000 per flight $7,000 per flight S4,000 per flight