Case: CVP Analysis

Ideal Airways is a small local carrier that flies among the northeast states. The company provides only one row of seats: coach. The following data are available:

Average full passenger fare

Number of seats per plane

Average load factor (seats occupied) Average variable cost per passenger Fixed operating costs per month

$150 120 70% $ 40

$1,800,000

You are a financial consultant hired by Ideal Airways and are asked to conduct the following analyses for the company. Please write up your analysis report and submit it to Kodiak "Assignments" module. Your report should be type-written, clear and well organized. In addition, your analyses must include computations.

Required:

• Determine the breakeven point in passengers and in revenues.
• Determine the breakeven point in number of flights.
• If Ideal raises its average full passenger fare to $200, it is estimated that the load factor will decrease to 55 percent. In this case, what will be the breakeven point in number of flights?
• The cost of fuel is a significant variable cost to any airline. If fuel charges increase $8 per barrel, it is estimated that variable cost per passenger will rise to $60. In this case, what will be the new breakeven point in passengers and in number of flights. (Refer to the original data.)
• Ideal has experienced an increase in variable cost per passenger to $50 and an increase in total fixed operating costs to $2,000,000. The company has decided to raise the average fare to $180. What number of passengers is needed to generate a net operating income of $1,000,000?
• Ideal is considering offering a discounted fare of $120, which the company feels would increase the load factor to 80 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising costs would be $100,000. How much net operating income would the discounted fare provide Ideal Airways if the company has 20 flights per day, 30 days per month? (Use the original data.)

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AC 202 Case: CVP Analysis

G. Ideal has an opportunity to obtain a new route. The company feels it can sell seats at $175 on the route, but the load factor would be only 60 percent. The company would fly the route 20 times per month. The increase in fixed costs for additional crew, additional planes, landing fees, maintenance, and so on, would total $100,000 per month. Variable cost per passenger would remain at $40.

• (1) Should the company obtain the route? Support your recommendation with specific data.
• (2) How many flights would Ideal need to earn net operating income of $45,800 per month on this route?
• (3) If the load factor could be increased to 75 percent, how many flights would the company need to earn net operating income of $45,800 per month on this route?
• (4) Whatqualitativefactors should Ideal consider in making its decision about acquiring this route?