Cost-volume-Profit analysis and pricing in the Airline Industry

1 -4 Cost-Volume-Profit Analysis and Pricing in the Airline Industry* (Edward Deakin, Adapted) Trans Western Airlines is considering a proposal to initiate air service between Phoenix, Arizona, and Las Vegas. Nevada. The route w ould be designed p rimarily to serve the recreation and tourist travelers who f requently t ravel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route. In addition, the airline expects to attract business travelers during the h ours of 7 A.M. to 6 P .M. on Mondays t hrough F ridays. The fare price schedule, or tariff, w ould be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of SKiQ, one way during business hours and a fare of $60^for all other hours would equalize the passenger load during business-travel and touVist-travel hours. To operate the route, the airline would needrfwq)200-passenger jet aircraft. The aircraft would be leased at an annual cost of $10,000^000 each. Other committed costs for ground service would amount to $5.000.000 per year. '~v^' Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately S80CIperhour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $ LOOOger hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45jriin-_ utes each way. The flexible costs associated with processing each passenger amount to/$5> This amount includes ticket processing, agent commissions, and baggage handling. Food and beverage service cost SlOper passenger and will be offered at no charge on flights during business hours. The airline expects to recover the cost of this service on non-businesshour flights through charges levied for alcoholic beverages. Required (1) If six ^business _flights and four tourist flights are offered eoc/rvwy every weekday, and 12 tounst flights are offered egc/uSy every Saturday and Sunday, w hat is the average^ number of passengers that must be carried on each flight to break even? ~*~~ (2) What is the breakeven load factor (percentgge_Qf_available seats occupied) on a route? (3) If Trans Western Airlines operates "the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 A.M. The airline is considering offering a "Rgd_I3ie^'_speci3irwhich would leave Phoenix daily at midnight and return by_6_A.M: The m arketing division estimates that if the fare"were~no f honfthan $40. the load factor would be 50% for each Red Die flight. Operating costs would be the same for this flight, but advertising costs of SlO.OOO^per weekjvould be required for promotion of the service. No foodat beverage co'stsTwould be borne by the company. Management wants to know tnTrhinimum fare that would be required to break even on the Red Die special, assuming that the marketing division's passenger estimates are coirect. 1 -4 Cost-Volume-Profit Analysis and Pricing in the Airline Industry* (Edward Deakin, Adapted) Trans Western Airlines is considering a proposal to initiate air service between Phoenix, Arizona, and Las Vegas. Nevada. The route w ould be designed p rimarily to serve the recreation and tourist travelers who f requently t ravel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route. In addition, the airline expects to attract business travelers during the h ours of 7 A.M. to 6 P .M. on Mondays t hrough F ridays. The fare price schedule, or tariff, w ould be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of SKiQ, one way during business hours and a fare of $60^for all other hours would equalize the passenger load during business-travel and touVist-travel hours. To operate the route, the airline would needrfwq)200-passenger jet aircraft. The aircraft would be leased at an annual cost of $10,000^000 each. Other committed costs for ground service would amount to $5.000.000 per year. '~v^' Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately S80CIperhour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $ LOOOger hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45jriin-_ utes each way. The flexible costs associated with processing each passenger amount to/$5> This amount includes ticket processing, agent commissions, and baggage handling. Food and beverage service cost SlOper passenger and will be offered at no charge on flights during business hours. The airline expects to recover the cost of this service on non-businesshour flights through charges levied for alcoholic beverages. Required (1) If six ^business _flights and four tourist flights are offered eoc/rvwy every weekday, and 12 tounst flights are offered egc/uSy every Saturday and Sunday, w hat is the average^ number of passengers that must be carried on each flight to break even? ~*~~ (2) What is the breakeven load factor (percentgge_Qf_available seats occupied) on a route? (3) If Trans Western Airlines operates "the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 A.M. The airline is considering offering a "Rgd_I3ie^'_speci3irwhich would leave Phoenix daily at midnight and return by_6_A.M: The m arketing division estimates that if the fare"were~no f honfthan $40. the load factor would be 50% for each Red Die flight. Operating costs would be the same for this flight, but advertising costs of SlO.OOO^per weekjvould be required for promotion of the service. No foodat beverage co'stsTwould be borne by the company. Management wants to know tnTrhinimum fare that would be required to break even on the Red Die special, assuming that the marketing division's passenger estimates are coirect. 1 -4 Cost-Volume-Profit Analysis and Pricing in the Airline Industry* (Edward Deakin, Adapted) Trans Western Airlines is considering a proposal to initiate air service between Phoenix, Arizona, and Las Vegas. Nevada. The route w ould be designed p rimarily to serve the recreation and tourist travelers who f requently t ravel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route. In addition, the airline expects to attract business travelers during the h ours of 7 A.M. to 6 P .M. on Mondays t hrough F ridays. The fare price schedule, or tariff, w ould be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of SKiQ, one way during business hours and a fare of $60^for all other hours would equalize the passenger load during business-travel and touVist-travel hours. To operate the route, the airline would needrfwq)200-passenger jet aircraft. The aircraft would be leased at an annual cost of $10,000^000 each. Other committed costs for ground service would amount to $5.000.000 per year. '~v^' Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately S80CIperhour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $ LOOOger hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45jriin-_ utes each way. The flexible costs associated with processing each passenger amount to/$5> This amount includes ticket processing, agent commissions, and baggage handling. Food and beverage service cost SlOper passenger and will be offered at no charge on flights during business hours. The airline expects to recover the cost of this service on non-businesshour flights through charges levied for alcoholic beverages. Required (1) If six ^business _flights and four tourist flights are offered eoc/rvwy every weekday, and 12 tounst flights are offered egc/uSy every Saturday and Sunday, w hat is the average^ number of passengers that must be carried on each flight to break even? ~*~~ (2) What is the breakeven load factor (percentgge_Qf_available seats occupied) on a route? (3) If Trans Western Airlines operates "the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 A.M. The airline is considering offering a "Rgd_I3ie^'_speci3irwhich would leave Phoenix daily at midnight and return by_6_A.M: The m arketing division estimates that if the fare"were~no f honfthan $40. the load factor would be 50% for each Red Die flight. Operating costs would be the same for this flight, but advertising costs of SlO.OOO^per weekjvould be required for promotion of the service. No foodat beverage co'stsTwould be borne by the company. Management wants to know tnTrhinimum fare that would be required to break even on the Red Die special, assuming that the marketing division's passenger estimates are coirect. 1 -4 Cost-Volume-Profit Analysis and Pricing in the Airline Industry* (Edward Deakin, Adapted) Trans Western Airlines is considering a proposal to initiate air service between Phoenix, Arizona, and Las Vegas. Nevada. The route w ould be designed p rimarily to serve the recreation and tourist travelers who f requently t ravel between the two cities. By offering low-cost tourist fares, the airline hopes to persuade persons who now travel by other modes of transportation to switch and fly Trans Western on this route. In addition, the airline expects to attract business travelers during the h ours of 7 A.M. to 6 P .M. on Mondays t hrough F ridays. The fare price schedule, or tariff, w ould be designed to charge a higher fare during business-travel hours so that tourist demand would be reduced during those hours. The company believes that a business fare of SKiQ, one way during business hours and a fare of $60^for all other hours would equalize the passenger load during business-travel and touVist-travel hours. To operate the route, the airline would needrfwq)200-passenger jet aircraft. The aircraft would be leased at an annual cost of $10,000^000 each. Other committed costs for ground service would amount to $5.000.000 per year. '~v^' Operation of each aircraft requires a flight crew whose salaries are based primarily on the hours of flying time. The costs of the flight crew are approximately S80CIperhour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $ LOOOger hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45jriin-_ utes each way. The flexible costs associated with processing each passenger amount to/$5> This amount includes ticket processing, agent commissions, and baggage handling. Food and beverage service cost SlOper passenger and will be offered at no charge on flights during business hours. The airline expects to recover the cost of this service on non-businesshour flights through charges levied for alcoholic beverages. Required (1) If six ^business _flights and four tourist flights are offered eoc/rvwy every weekday, and 12 tounst flights are offered egc/uSy every Saturday and Sunday, w hat is the average^ number of passengers that must be carried on each flight to break even? ~*~~ (2) What is the breakeven load factor (percentgge_Qf_available seats occupied) on a route? (3) If Trans Western Airlines operates "the Phoenix-Las Vegas route, its aircraft on that route will be idle between midnight and 6 A.M. The airline is considering offering a "Rgd_I3ie^'_speci3irwhich would leave Phoenix daily at midnight and return by_6_A.M: The m arketing division estimates that if the fare"were~no f honfthan $40. the load factor would be 50% for each Red Die flight. Operating costs would be the same for this flight, but advertising costs of SlO.OOO^per weekjvould be required for promotion of the service. No foodat beverage co'stsTwould be borne by the company. Management wants to know tnTrhinimum fare that would be required to break even on the Red Die special, assuming that the marketing division's passenger estimates are coirect