Question
Yoou decide to start your own Aircraft Charter Company much like this one http://247jets.com You stumble on this site https://www.globalair.com/aircraft-for-sale/ where you buy your first
Yoou decide to start your own Aircraft Charter Company much like this one http://247jets.com
You stumble on this site https://www.globalair.com/aircraft-for-sale/ where you buy your first aircraft. You are both nervous and excited about your new investment and you know if you do not start making a profit soon, your spouse will make you sell the aircraft. You give yourself one year to turn a profit, but first, you need to know how much sales you need to make that happen.
Using information from this blog https://blog.globalair.com/post/Measuring-the-Cost-of-Operating-an-Aircraft.aspx and making intelligent and educated assumptions when information is not specifically given, compute the following for your first year in business:
As sales are not given, Im estimating that total number of flights flown in the 1st year would be 300 and each flight would cost $2000
Im also estimating that number of flights would be the cost driver
Target profit would be $150,000
Fixed/Variable costs are simply for illustrative purposes (to ensure that the concepts are understood; the actual prices are not likely realistic estimates nor are all fixed/variable costs accounted for)
I think I did the solution without accounting for number of passengers per flight; assume 1 person per flight (to compare to what I have as a solution to check if the computations are correct) and then 10 people per flight (Im not sure how that would impact any of the computations)
1- Determine your contribution margin in dollars and as a ratio
2 - Determine your breakeven point in units of your cost driver
3 - Determine your breakeven point in dollars
4 - Make some assumption that increases fixed cost (by $30,000), compute the new breakeven point
5- Make some assumption that increases variable cost (by $75,000), compute your new breakeven point
6 -Make some assumption concerning your target profit, determine what your sales should be to achieve your target profit
Variable Costs (yearly):
Engine Overhaul - $8,000
Fuel - $420,000
Snacks - $3,000
Landing & Parking Fees $5,000
Maintenance - Component Overhauls $2,000
Maintenance Labor $3,000
Maintenance Parts $2,500
Propellers Overhaul $1,500
Total = $450,000
Fixed Costs (yearly):
Aircraft Lease or Loan Payments (or Interest) $53,000
Aircraft Modernization/Upgrades $2,500
Aircraft Property Tax, Registration or User Fees $1,000
Computerized Maintenance Tracking $ 2,500
Hangar Rent/Lease $ 12,000
Insurance $5,000
Navigation Chart Service $1,500
Recurrent Training $2,500
Total = $45,000
SOLUTION I have come up with (work below) based on the above information and to answer the questions:
1- Determine your contribution margin in dollars and as a ratio $150,000 / 25 %
2- Determine your breakeven point in units of your cost driver 160
3- Determine your breakeven point in dollars $320,000
4- Make some assumption that increases fixed cost (by $30,000), compute the new breakeven point 220 units / $440,000
5- Make some assumption that increases variable cost (by $75,000), compute your new breakeven point 320 units / $640,000
6- Make some assumption concerning your target profit, determine what your sales should be to achieve your target profit $920,000
| Fly The Friendly Skies Corporation | ||||||
| CVP Income Statement (Estimated) | ||||||
| For the Year Ending December 31st 2017 | ||||||
| Total | Per Unit | |||||
| Sales (300 flights) | $ 600,000.00 | $ 2,000.00 | ||||
| Variable Costs | $ 450,000.00 | $ 1,500.00 | ||||
| Contribution Margin | $ 150,000.00 | $ 500.00 | ||||
| Fixed Costs | $ 80,000.00 | |||||
| Net Income | $ 70,000.00 | |||||
| Contribution Margin Ratio | = | 25.00% | ||||
| Break-Even Point in Units (Flights) | 160 | |||||
| Break-Even Point in Dollars | $ 320,000.00 | |||||
| Margin of Safety in Dollars | $ 280,000.00 | |||||
| Margin of Safety Ratio | 46.67% | |||||
| Sales dollars required to earn net income (target profit) of $150,000 | $ 920,000.00 | |||||
| If Fixed Costs increased by $30,000 due to increases in costs for hanger rental ($25,000) and taxes/fees ($5000) | ||||||
| Break-Even Point in Units (Flights) | 220 | |||||
| Break-Even Point in Dollars | $ 440,000.00 | |||||
| If Variable Costs increased by $75,000 due to increases in fuel ($55,000) and landing/parking fees ($20,000) | ||||||
| Break-Even Point in Units (Flights) | 320 | Revised Contribution Margin Ratio | 12.50% | |||
| Break-Even Point in Dollars | $ 640,000.00 | |||||
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