QUESTION 3B

AA Airlines provide service to 30 cities around the world. The Operation Manager of AA Airlines

is trying to decide whether to introduce a new discount fare. Currently, a 134-seat 737 airplane on

average has 75 passengers per flight. The regular fares produce an average revenue of RM0.15 per

passenger mile.

Unlike regular fare, a discount fare is subject to restrictions regarding time of departure and length

of stay, which is not the most preferred option for many. However, budget travellers especially,

would find the lower price attractive. The proposal suggests that a discount fare of 40% will

produce three new additional passengers. Also, three of the previously committed passengers will

switch to the discount fare from the regular fare.

Required:

1. Should the Operation Managers plan be executed? Show calculation to support your answer.

(6 marks)

2. Suppose the maximum allowed allocation to new discount fares is 50 seats, and these seats

will be filled. How many passengers (previously committed to regular fare) will have to switch

so that the total revenue per mile will be indifferent either with or without discount plan?

(4 marks)

3. Accountants do not ordinarily record opportunity costs in the formal accounting records. Do

you agree with the statement? Why or why not?