Assume base case data of:

FC = Annual Fixed Cost of $840,000

VC = Variable Costs of $6.00/flight mile

RR = Revenue Rate of $9.00/flight mile

Breakeven Calculation = 840,000

9.00 - 6.00

= 280,000 flight miles

1.If High Point were to decrease its $9.00 revenue rate by 5%, what would the new level of breakeven flight miles be?

New Revenue Rate (after 5% reduction) = $9.00 (0.95) = $8.55

New Contribution Margin per flight miles = $8.55 - $6.00 = $2.55

New Breakeven flight miles = Annual fixed cost / New contribution per flight miles

= $840,000 / $2.55 = 329,412 flight miles

If the original revenue rate of $9.00 was decreased by 5%, High Point's new level of breakeven flight miles would be 329,412 flight miles.

2.If High Point were to incur another $100,000 of fixed costs, what additional flight miles would need to be flown at the $9.00 flight-mile revenue rate to keep the company at a financial breakeven level?

New FC = $840,000 + $100,000 = $940,000

New Breakeven flight miles = Annual fixed cost / (RR - VC)

= $940,000 / ($9.00 - $6.00) = 313,333 flight miles

Breakeven Annual Flight Miles = 313,333 flight miles

If fixed costs increased by $100,000 a total of ______ flight miles would be required with an additional 313,333 flight miles over Grace's original calculation of 280,000 flight miles.

3.If High Point could renegotiate its fuel contract and thus decrease variable costs per flight mile by 8%, how much could flight miles decrease, and the operations remain at a breakeven level (assuming all the other base case financial facts did not change)?

New VC (reduced by 8%) = $6.00 (0.92) = $5.52

Revised contribution per flight mile = RR - VC = $9.00 - $5.52 = $3.48

New Breakeven flight miles = FC / Revised contribution per flight mile = 840,000 / 3.48 = 241,379 flight miles

Decrease by new breakeven flight miles = 280,000 - 241,379 = 38,621 flight miles

In comparison to the base case breakeven annual flight miles of 280,000 flight miles, the breakeven annual flight miles required with adjusted variable costs of $5.52 per flight mile allows for a decrease of 38,621 annual flight miles to remain at a breakeven level.

4.If High Point's actual flight miles were 12% below the case breakeven level of 280,000 flight miles, what fixed cost reduction would be required to keep the operation at a financial breakeven level?

Actual flight miles = Breakeven flight miles - 12% = 280,000 -12% = 246,400 flight miles

New FC = Actual breakeven flight miles x Contribution per flight mile =

= 246,400 ($3.00) = $739,200

If actual flight miles were 12% below the base case breakeven level of 280,000 flight miles, to keep the operation at a financial breakeven level, annual fixed costs would need to be reduced by $739,000.

5.If the company landed three new contract clients, thereby increasing projected flight miles by 20%, above the 280,000 base case level, to what level could variable costs rise, and the operation remain at a financial breakeven level?

Actual flight miles = Breakeven miles + 20% = 280,000 + 20% = 336,000 flight miles

Revised breakeven flight miles = FC / Revised contribution per flight mile = 336,000

Revised contribution per flight mile = 840,000 / 336,000 = $2.50 per flight mile

Revised variable cost = RR - Contribution margin = $9.00 - $2.50 = $6.50 per flight mile

If projected flight miles increased to 20% above the base case level of 280,000 flight miles, variable costs could rise to $6.50/flight mile and the operation would still remain at a financial breakeven level.