Joe Bleau, Indiana's Vice President of Operations, was recently approached by a tourist agency to fly his clients from Toronto to Cancun, Mexico. The tourist agency is offering Indiana $160,000 per flight for a 747 aircraft. A normal flight (based on average occupancy and regular round-trip fares) would normally generate $260,000 in gross revenue for Indiana.

Joe Bleau knows that Indiana currently has 2 747 aircraft that are not in use. The company has just eliminated some unprofitable routes which has freed up those 2 planes for other purposes. The company has no plans at this time to add new destinations.

To help him in his decision, Joe Bleau asked the company's accountant for information on the costs associated with such a route. The accountant provided him with the following information on the costs of a Toronto - Cancun trip on a 747 aircraft. This information is based on a regular/normal flight. (see table 1).

Table 1

Income$260,000

Expenses

Costs directly related to the flight $95,000

Fixed costs broken down or allocated to

each flight 105,000 200,000

Profit $60,000

The costs directly related to the flight include, among others, gasoline, ticket reservation and sales costs, direct labor (hostesses, pilots), newspapers, meals and airport fees for landing. The fixed costs broken down by flight cover the following fixed costs: aircraft maintenance, depreciation of aircraft, buildings and equipment, and administrative and advertising costs.

Considering the costs presented in Table 1, Joe Bleau realizes that the costs related to the flight would be even lower since the costs related to the reservation and sale of tickets would be saved (the travel agency would do it). These costs amount to $5,000 per flight.

For your information, Indiana Airlines has a turnover of 10 million annually. It currently serves the North and South American market with some flights to Europe. It intends to expand its flights to Asia and Australia within the next few years. Finally, it currently has over 300 aircraft under its belt.

Work to be done:

1. Should Indiana accept or reject the travel agency's offer? (For this question, present the relevant data table and your quantitative analysis only) (10 pts)

2. What other qualitative factors should be considered in this decision? What would you suggest to the Beausoleil business owner from a qualitative standpoint? (5 pts)

3. Would your decision change if the following additional information were known to you: the information mentioned in the case is the same except that Indiana is at full capacity (i.e., all of its planes are in use) and in order to accept the travel agency's special order it must cancel its least profitable flight at this time. This flight (Toronto - Vancouver) contributes only $80,000 to the company's common fixed cost and profit. (2 pts)

4. How much does the travel agency's offer have to be for Indiana Airlines to be undecided about accepting or rejecting the offer? (1 pts)