Contribution approach, relevant costs. (40 minutes) Air Calabria owns a single jet aircraft and operates between Cantazaro and Venice.

Flights leave Cantazaro on Mondays and Thursdays and depart from Venice on Wednesdays and Saturdays. Air Calabria cannot offer any more flights between Cantazaro and Venice. Only tourist-class seats are available on its planes. An analyst has collected the following information: mkio65

For simplicity, assume that fuel costs are unaffected by the actual number of passengers on a flight.
REQUIRED 1. What is the operating profit that Air Calabria makes on each one-way flight between Cantazaro and Venice?
The Market Research Department of Air Calabria indicates that lowering the average one-way fare to EUR 480 will increase the average number of passengers per flight to 212. Should Air Calabria lower its fare?
Cima-Rosa,a tour operator, approaches Air Calabria on the possibility of chartering (renting out) its jet aircraft twice each month, first to take CimaRosa’s tourists from Cantazaro to Venice and then to bring the tourists back from Venice to Cantazaro. If Air Calabria accepts Cima-Rosa’s offer, Air Calabria 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, Cima-Rosa will pay Air Calabria EUR 75,000 to charter the plane and to use its flight crew and ground service staff;

(b) Cima-Rosa will pay for fuel costs; and

(c) CimaRosa will pay for all food costs. On purely financial considerations, should Air Calabria accept Cima-Rosa’s offer? What other factors should Air Calabria consider in deciding whether or not to charter its plane to Cima-Rosa?

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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 Calabria (all tickets are booked by 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 EUR 500 EUR 14,000 per flight EUR 20 per passenger 8% of fare EUR 53,000 per flight EUR 7,000 per flight EUR 4,000 per flight