Boing, Inc., operates a commuter airline. Last year the airline flew 10,000 flights and sold 400,000 oneway tickets at $59 per ticket. Total costs amounted to $21,600,000. An activity-based costing study recently revealed that Boing’s costs include the following components. The costs associated with number of passengers are unit-level costs. All other costs are higher level costs.

Activity Cost Driver Activity Cost MMS iiowin (000/000 Mies BPS2 WEF WAI) i. oe oesescesdlvcssessssciisuscvasteesssstteawceeee $ 4,000,000 Number of passengers (400,000 passengers at $4 per paSSeNGer) ...... ccc 1,600,000 Number omtiohts!(OO00Nlights"at $840 pentlight) es... eso. c.ccs st screschcatebeccetisecee 8,400,000 Number of television advertisements (20 at $60,000 €ACh) 0... cccccceectttcceetetetteenen 1,200,000 ENT POLAMCUCAS Cerra tee Meet tae tree pene ame Oat cruneceuan ten osu acenocie tna rade scaseuiion capiuec gran naieaareeee 4,200,000 PAIN SUG etM IO)c linii meem Miners sree ene a Ree nbn Cees hn deen Prue ta uasecs aul saad’ ps es digahd ie oie aaciaess 1,600,000 MaAnKCting ame: acliminiStiathVees stew merry Aedes tote een aed dee Mens ies. telack os ceens see aoeecen ante 4 600,000 MOV eo boc ccih bag'tges Bs anise aS nee NSP ERO GES Pr ene =o SE DT CEE se Aer ney NOD cee Sonn Se Sern re $21,600,000 Required Complete the following requirements.

a. Assume that the projections for next year include 10 percent increases in miles flown, passengers, and flights. Advertisements will double. The cost-driver rates for miles, passengers, flights, and advertisements are projected to increase by 5 percent over the amounts listed. Costs for airplane leases, ground facilities, and sales and administrative costs will increase 7 percent. With those projections, prepare a financial model that has a ticket price increase of $5 per one-way ticket.

b. Management wants to consider a new ticket-pricing method. Assume that it believes it can sell 300,000 tickets for reserved seating at $75 per ticket. In addition, it proposes to sell discount tickets on less popular flights for $40 per ticket. Using the same cost and activity data in requirement

(a), how many discount tickets must Boing sell to generate the same operating income as it did when it sold 440,000 tickets for $64 each?

c. What happens if the number of $75 tickets Boing can sell in requirement

(b) is 10 percent less than expected? Do you recommend that Boing add the new service in requirement (b)?