Contribution approach, relevant costs. Air Pacific owns a single jet aircraft and operates between Vancouver and the Hawaiian Islands. Flights leave Vancouver on Mondays and Thursdays and depart from Hawaii on Wednesdays and Saturdays. Air Pacific cannot offer any more flights between Vancouver and Hawaii. Only tourist-class seats are available on its planes.

An analyst has collected the following information:

Seating capacity per plane Average number of passengers per flight Flights per week Flights per year Average one-way fare Variable fuel costs Food and beverage service cost

(no charge to passenger)

Commission to travel agents paid by Air Pacific

(all tickets are booked by7 travel agents)

Fixed annual lease costs allocated to each flight Fixed ground services (maintenance, check-in, baggage handling) cost allocated to each flight Fixed flight crew salaries allocated to each flight 360 passengers 200 passengers 4 flights 208 flights

$550

$15,400 per flight

$22 per passenger 8% offare

$58,300 per flight

$7,700 per flight

$4,400 per flight For simplicity, assume that fuel costs are unaffected by the actual number of passengers on a flight.

Required 1. What is the operating income that Air Pacific makes on each one-way flight between Vancouver and Hawaii?

2. The market research department of Air Pacific indicates that lowering the average one¬

way fare to $528 will increase the average number of passengers per flight to 212. Should Air Pacific lower its fare?

3. Travel International, a tour operator, approaches Air Pacific on the possibility7 of charter¬

ing (renting out) its jet aircraft twice each month, first to take Travel International’s tourists from Vancouver to Hawaii and then to bring the tourists back from Hawaii to Vancouver. If Air Pacific accepts Travel International's offer, Air Pacific will be able to offer only 184 (208 - 24) of its own flights each year. The terms of the charter are as follows:

(a) For each one-way flight, Travel International will pay Air Pacific $82,500 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 purely financial considerations, should Air Pacific accept Travel International’s offer?

What other factors should Air Pacific consider in deciding whether to charter its plane to Travel International?