PROBLEM 4-5.

Break-Even, What If

Michael Bordellet is the owner/pilot of Bordellet Air Service. The company flies a daily round trip from Seattle's Lake Union to a resort in Canada. In 2013, the company reported an annual income before taxes of $120,403 although that included a deduction of $70,000 reflecting Michael's salary.

Revenue($360 1,560 passengers) $561,600

Less costs:

Pilot (owner's salary) $70,000

Fuel (35,657 gallons $4.15) 14,977

Maintenance (variable) 127,920

Depreciation of plane 25,000

Depreciation of office equipment 2,800

Rent expense 40,000

Insurance 20,000

Miscellaneous (fixed) 7,500 441,197

Income before taxes $120,403

Revenue of $561,600 reflects six round trips per week for 52 weeks with an average of five passengers paying $360 each per round trip (6 52 5 $360 = $561,600). The flight to the resort is 400 miles one way. With 312 round trips (6 per week 52 weeks), that amounts to 249,600 miles. The plane averages 7 miles per gallon.

Required

a.

How many round trips is Michael currently flying, and how many round trips are needed in total to break even?

b.

How many round trips are needed so that Michael can draw a salary of $110,000 and still not show a loss?

c.

What is the average before-tax profit of a round trip flight in 2013?

d.

What is the incremental profit associated with adding a round trip flight?