CLOUD 9 CHARTER On November 5, 2017 Wayne Tebb was looking over his company's income statement for the year ending October 31, 2017. Cloud 9 Charter, a small airline charter service company based in Vancouver, BC, had incurred another net loss in fiscal 2017. Tebb needed to know the profitability of each of his three airplanes to decide whether he should continue to fly all three types. Company Background Cloud 9 Charter was established in 2002 by Wayne Tebb who had accumulated substantial personal wealth from real estate investments. Tebb loved flying and yearned to own his own business. Tebb had hoped, at the very least, that the company would have earnings comparable to a low risk investment. Chartered airlines ran their flights "on demand rather than on a set schedule like the larger airlines. Customers would request a date, time, location and even plane type and Cloud 9 would attempt to accommodate the request. Sales came from two basic markets: business executive travel and medical emergency flights. The business sector represented 70% of Cloud 9's revenue, while medical emergencies (paid for by the government) represented 25% of revenues. The remaining 5% of revenues came from pleasure flights. Price was one of Cloud 9's key competitive factors. Costs were controlled by fuelling at the cheapest locations; however, pilots' salaries were generous to help promote customer loyalty. Cloud 9's pilots were expected to be able to fly more than one type of plane and be willing to be on-call at any time for emergency medical flights. Aircrafts Cloud 9's fleet was made up of three planes: the DV5, the WS21 and the 340. The DV5 was a small 5-seat propeller plane used mostly by cost conscious customers. It was the slowest and least comfortable of the three planes. The WS21 was a pressurized 7-seat plane that was more comfortable and faster than the DV5. The 340 jet was the fastest plane; therefore, it was used for longer flights and was priced higher than the other two planes. Business travellers preferred the 140 or WS21 to the DV5; however the government only booked the cheapest alternative available. When the DV5 was not available the government often went to other competitors. Income Statement Development Currently, Tebb only had a consolidated income statement available (see Exhibit 1) for review. Customers were charged a basic fee for mileage', as well as a fuel fee? and landing fees (see Exhibit 2 for total revenues by plane type). Some cost data was kept for each aircraft. Costs like fuel, parts, flight insurance and landing fees could be traced to each of the three planes (see Exhibit 3). Some costs were shared by the three planes, but Tebb felt that he could allocate them using an appropriate cost driver. For example, selling costs could be allocated to each plane based on revenues earned (see Exhibit 4). Mileage prices were $1.40 per km for the DV5, $1,63 per km for the WS21 and $2.03 per km for the 340 2 Fuel prices were $0.50 per km for the DV5, $0.68 per km for the WS21 and $0.90 per km for the 140 Maintenance Wages would be allocated based on Parts; Pilot salaries based on plane hours flown; General and Administrative costs based on kilometres flown. Details required to calculate these allocations are shown in Exhibit 5. Interest was paid on the debt needed to finance the company. A lot of the debt was used to purchase the DV5 and the WS21; therefore Tebb felt that they should be allocated the interest cost equally. The J40 was leased, and the lease payment in Exhibit 1 related solely to the 140. Conclusion Tebb thought his task would be relatively straightforward given the data he had compiled. He was suspicious that one or two planes were not "carrying their weight and was anxious to see the results so that further decisions could be made to improve profitability. He was specifically wondering about fuel costs and the best way to analyze them. Required You have been hired by Wayne Tebb to prepare a report and recommendation about Cloud 9 Charter's airplane mix. Your mini report should have a memo, introduction, background information relevant to the analysis, alternative identification, a qualitative and quantitative assessment of the alternatives, and a recommendation and action plan. Please include the following: a) A segmented (by plane type), contribution format income statement for Cloud 9 Charter. Please include a totals column. b) Would you recommend "dropping" any of the airplanes? Why or why not? c) What other recommendations do you have for Tebb to improve the profitability of Cloud 9 Charter? d) Mr. Tebb said that he heard something about preparing a Balanced Scorecard. Is that something he should consider for his business to make more money? Provide a few paragraphs explaining what the balanced Scorecard is, and pros and cons for him to consider. e) Provide a one-page appendix indicating what a portion of the balance scorecard would look like providing at least 1 KPI for each perspective that might be helpful for Mr. Tebb to understand what a Balanced Scorecard could look like. 3 Pilots were paid a base salary and benefits for hours flown but were also expected to complete administrative tasks which is why they are not listed as "direct" costs. Exhibit 1 - Consolidated Income Statement INCOME STATEMENT For the year ended October 31, 2017 Revenues: Mileage Revenue Fuel Revenue Landing Fee Revenue Total Revenue $822,697 341,453 114,450 $1,278,600 Operating Expenses: Fuel Landing Fees Depreciation Flight Insurance Lease Parts Maintenance Wages Pilot Wages Total Operating Expenses $292,308 114,616 108,544 34,317 141,205 135,830 97,100 196,300 $(1,120,220) Selling Costs General & Administrative Costs Interest ( 52,100) ( 134,076) L 31,980) Net Loss $1 59,776) Exhibit 2 - Revenues by Plane Type Mileage Revenue Fuel Revenue Landing Fee Revenue DV5 WS21 J40 $ 149,811 $ 396,416 $ 276,470 53,504 165,376 122,573 26,833 51,936 35,681 $ 230,148 $ 613,728 $ 434,724 Exhibit 3 - Costs by Plane Type Fuel Landing Fees Depreciation Flight Insurance Parts DV5 WS21 J40 $ 40,479 $ 130,570 $ 121,259 27,112 51,874 35,630 28,563 79,981 N/A 8,025 13,132 13,160 27,166 71,990 36,674 $ 131,345 $ 347,547 $ 206,723 Exhibit 4 - Cost Allocation Example (Selling Costs based on Revenue Earned) DV5 WS21 J40 Total Revenue $ 230,148 $ 613,728 $ 434,724 $ % of Total Revenue* 18% 48% 34% Selling Costs Allocated** $ 9,378 $ 25,008 $ 17,714 $ Total 1,278,600 100% 52,100 * $230,148 / $1,278,600 = 0.18 or 18% ** $52,100 x 0.18 = $9,378 Exhibit 5 - Additional Plane Details DV5 107,008 Kilometres Flown Landings Made Hours Flown ws21 243,200 310 550 J40 136,192 124 240 242 Total 486,400 676 1,190 400