Part 7. Cost-Volume-Profit Analysis

United Scareways Airlines (U.S. Air) is a regional airline carrier in Big Sky Country. All seats are coach and the following data are available.

Number of seats per plane 120

Average load factor (percentage of seats filled) 80%

Average full passenger fare $115

Average variable cost per passenger $65

Fixed operating costs per month $1,100,000

(a) What is the contribution margin percentage?

(b) What is break-even point in passengers and revenues?

(c) If budgeted sales are $4,150,000, what is the margin of safety for the airlines in dollars?

(d) What is break-even point in number of flights?

(e) If U.S. Air raises its average full passenger fare to $140, it is estimated that the load factor will decrease to 75 percent. What will be the breakeven point in number of flights?

(f) The cost of fuel is a significant variable cost to the airline. If fuel charges increase by $15 per barrel, it is estimated that variable cost per passenger will rise to $75. In this case (referring back to the original data), what would be the new break-even point in passengers and in number of flights?

(g) Using the original data, U.S. Air is considering offering a discounted fare of $90, which the company feels would increase the load factor to 90 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising costs would be $130,000. How much pretax income would the discounted fare provide U.S. Air if the company has 40 flights per day, 30 days per month?