Break-Even Analysis (Group Contribution)

Break-even analysis attempts to determine the volume of sales necessary for a manufacturer to cover costs or to make revenue equal costs. It is helpful in setting prices, estimating profit or loss potentials, and determining the discretionary costs that should be incurred. The general formula for calculating break-even units is

Break-Even Units = Total Fixed Costs / ( Unit Selling Price Unit Variable Cost )

1. Use the formula to calculate how many cups of coffee an airport caf would need to sell to break even if fixed costs are $5,000, a cup of coffee costs $0.60 to make, and each cup sells for $3.00. For airlines, costs are mainly fixed, variable cost is negligible, and break-even is calculated for load factor instead of units. The formula for calculating the break-even load factor is: Break-Even Load Factor = Cost per Available Seat Mile / Yield per Passenger Mile
2. Given the total operating cost of $1.6 million and 8.5 million available seat miles, calculate the cost per available seat mile (CASM).
3. What is the break-even load factor if CASM is $0.20 and the fare is $0.35 per mile? For this calculation, the yield is the same as the fare.
4. In Airline, fare sales will reduce the yield. You can expect yield per passenger mile to drop about 10% for each month of fare sale. Calculate the break-even load factor if CASM is $0.20, the regular fare is $0.35 per mile, and you are offering a two-month fare sale.
5. What impact might a 4% increase in compensation have on the break-even load factor for an airline?

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