CVP Analysis for Fare Pricing: Trans Western Airlines: Trans Western Airlines is preparing to submit a proposal to its board of directors for air service between Phoenix, Arizona, and Las Vegas, Nevada. The route would be designed primarily to serve the recreation and tourist travelers who frequently travel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route.

In addition, the airline expects to attract business travelers during the hours of 7 a.m. to 6 p.m. on Mondays through Fridays. The fare price schedule or tariff would be designed to charge a higher fare during business travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of $40 one way during business hours and a fare of $30 for all other hours would result in an equal number of passengers on each flight.

To operate the route, the airline would need two 120-passenger jet aircraft. Theaircraft would be leased at an annual cost of $2,800,000 each. Other fixed costs attributable to the Phoenix-Las Vegas route would amount to $1,940,000 per year. These fixed costs would not change regardless of the number of flights. Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The cost of the flight crew is approximately $600 per hour of flying time.

Aircraft maintenance and fuel costs are also a function of flying time. These costs are estimated at $210 per hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45 minutes each way.

The costs associated with processing each passenger for each flight amount to $7. This includes ticket processing and variable costs of baggage handling. Food and beverage service is expected to break even through the charges levied for alcoholic beverages.

Required:

a. If 5 business flights and 3 tourist flights are offered each way each weekday, and10 tourist flights are offered each way every Saturday and Sunday, what numberof passengers must be carried per flight on average to break even? Assume the product mix for the route is 50 percent business and 50 percent tourist.

b. The board of directors requires an estimate of the load factor (or percentage ofavailable seats occupied on a route) required to break even on a given route. What is the break-even load factor for this proposed route?

c. If Trans Western Airlines decides to operate the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 a.m. The airline is considering offering a daily "Red Die" special that would leave Phoenix at midnight and would return by 6 a.m. The marketing division estimates that if the one-way fare were no more than $35, at least 60 new passengers could be attracted to each one-way Red Die flight. Operating costs would be at the samerate for this flight, but additional advertising costs of $2,400 per week would be required for promotion of the service. Management wishes to know the minimumfare that would be required to break even on the Red Die special, assuming the marketing division's passenger estimates are correct.