PART 1: Air Supply (30 points): Air Supply is a small company with a single, all-tourist-class jet aircraft. It operates flights between Barcelona and the Canary Islands. Flights leave Barcelona on Mondays and Thursdays and return from the Canary Islands on Wednesdays and Saturdays. Air Supply cannot offer any more additional flights. An analyst has collected the following information on the company ("flight" means one-way flight): Seating capacity of the plane 360 passengers Average number of passengers per flight 200 passengers Flights per week 4 flights Flights per year 208 flights Average one-way fare $ 500 Variable fuel costs per flight $ 14,000 Food and beverage service cost per passenger (at no charge to passenger) $ 20 Commission to travel agents paid by Air Supply (all tickets are booked by travel agents) 8 % of fare Fixed annual lease costs allocated to each flight $ 53,000 per flight Variable ground services (maintenance, check in, baggage handling) cost allocated to each flight $ 7,000 per flight Fixed flight crew salaries allocated to each flight $ 4,000 per flight For simplicity, assume that the fuel costs are not affected by the actual number of passengers on a flight. Required: a) What is the contribution margin that one additional passenger generates for Air Supply on an average flight? (3 Points) __________________________ b) What is the contribution of one average flight to cover fixed cost and to generate a profit? (4 Points) __________________________ c) What is the net accounting profit per average flight? (3 Points) __________________________ Name: __________________________ page 3 of 12 d) By which amount would Air Supply have to lower its fixed cost to increase its annual profit by 10%? (2 Points) ___________________________ e) Another oil crisis hits and fuel costs double. Which fare price allows Air Supply to break even on an average flight? (3 Points) ___________________________ f) Consider that Air Supply must cancel one average trip (=2 one-way flights) for the year (flight crew does not want to work during the Christmas week). How much profit would Air Supply lose? Put differently, by how much does the company's profit decrease? (3 Points) ___________________________ g) Market research indicates that lowering the average one-way fare to $ 480 will increase the average number of passengers per flight to 212. Should Air Supply lower its fare? (1 Point) Circle your answer YES NO Show here the calculations that back up your decision: (2 Points)