ONLY HAVE A QUESTION ABOUT ATTACHED SOLUTION>>> WHERE DOES THE $100 COME FROM IN THE PRODUCT MIX??? 1-4 C ost- 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 would be designed primarily to serve the recreation and tourist travelers who frequently travel 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 hours of 7 A.M. to 6 P.M. on Mondays through Fridays. The fare price schedule, or tariff, would 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 $100 one way during business hours and a fare of $60 for all other hours would equalize the passenger load during business-travel and tourist-travel hours. To operate the route, the airline would need two 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. 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 $800 per hour of flying time. Fuel costs are also a function of flying time. These costs are estimated at $1,000 per hour of flying time. Flying time between Phoenix and Las Vegas is estimated at 45 minutes 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 $10 per 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 (I) If five business flights and three tourist flights are offered each way every weekday, and ten tourist flights are offered each way every Saturday and Sunday, what is the average number of passengers that must be carried on each flight to break even? IN THE ATTACHED SOLUTION: WHERE DOES THE $100 COME FROM IN THE PRODUCT MIX????

Calculation of Total trips: Per week 5 business flights x 2 ways x 5 days = 3 tourist flights x 2 ways x 5 days = 10 tourist flights x 2 ways x 2 days = Total trips per week Therefore, total trips per year = 120 trips x 52 weeks = 6,240 trips Per Year 50 trips 30 trips 40 trips 120 trips 2600 1560 2080 6240 trips Total business flights per year = 2600 Total tourist flights per year = 1560+2080 = 3640 Revenue expected per passenger: $100 for business flights per head $70 for tourist flights per head (Tourist per head charge = $60 fare + $10 recovery of food and beverage charges = $70) Variable costs: Total trips in a year = 6,240 trips. Time taken per trip = 45 minutes. Therefore, time taken for 6,240 trips = 6240 x 45 = 280800 minutes (or) 4,680 hours Flight crew salaries = $800 per hour x 4,680 hours = $3,744,000 per annum Fuel costs = $1,000 per hour x 4,680 hours = $4,680,000 per annum Flexible costs = $5 per passenger Food & Beverage costs = $10 per passenger Fixed costs: Lease costs = $10,000,000 per aircraft x 2 aircrafts = $20,000,000 per year Ground service costs = $5,000,000 per year Although the Flight crew salaries and fuel costs are variable, it can be treated as fixed for calculation purposes, since the number of hours per annum are already planned. Therefore, total variable cost per passenger = $5 + $10 = $15 Total fixed costs (for calculation purposes): Flight crew salaries(considered fixed for calculation purpose) Fuel costs (considered fixed for calculation purpose) Lease costs Ground service costs Total fixed costs Business trips: Tourist trips: Revenue $100 $70 $3,744,000 $4,680,000 $20,000,000 $5,000,000 $33,424,000 V.cost $15 $15 Contribution $85 $55 P/V ratio 85% 78.57% BEP (number of passengers) can be computed using a weighted average contribution margin as follows: Class mix: Business: 2600 trips/6240 x 100 = 41.67% Tourist: 3640 trips/6240 x 100 = 58.33% Weightedcontribution margin: Business: 41.67% x $85 = Tourist: 58.33% x $55= Total weighted contribution margin (Class mix x contribution margin) $35.42 $32.08 $67.50 BEP (number of passengers) = Fixed cost/weighted contribution margin = $33,424,000/$67.50 495170.37037 (not rounded right now) Breakup of number of passengers in each class: Business: 495,170.37037 x 41.6666666% = 206,320.987621 Tourist: 495,170.37037 x 58.333333% = 288,849.382714 (not rounded right now) (not rounded right now) Number of business passengers required each trip = 206,320.987621/2600 trips = 79 Number of tourist passengers required each trip = 288,849.382714/3640 trips = 79 Answer: AVERAGE NUMBER OF PASSENGERS TO BE CARRIED ON EACH FLIGHT TO BREAKEVEN = 79 (ROUNDED) 79 IN BUSINESS FLIGHTS AS WELL AS 79 IN TOURIST FLIGHTS PLEASE NOTE THAT THIS 79 IS A ROUNDED FIGURE AND HENCE APPROXIMATE. THE ACCURATE VALUE CANNOT BE TAKEN AS THE NUMBER OF PASSENGERS CANNOT BE IN DECIMALS. (rounded) (rounded) (79.35 unrounded) (79.35 unrounded)