Westcost Air Co. leases a single jet aircraft and operates between San Francisco and the Fiji. Flights leave San Francisco on Mondays and Thursdays and depart from Fiji on Wednesdays and Saturdays. Westcost Air Co. cannot offer any more flights between San Francisco and Fiji. Only tourist-class seats are available on its planes. An analyst has collected the following information:
Seating capacity per plane 380 passengers
Average number of passengers per flight 175 passengers
Flights per week 4 flights
Flights per year 208 flights
Average one-way fare $325
Variable fuel costs $14,000 per flight
Food and beverage service costs/passenger $4 per
Commission to travel agents paid by Air Frisco 10% of fare (all tickets are booked by travel agents)
Fixed annual lease costs allocated to each flight $53,000 per flight
Fixed ground services (maintenance, check in, baggage handling) costs allocated to each flight $7,500 per flight
Fixed flight crew salaries allocated to each flight $7,000 per flight
Required:
1. Calculate the operating income that Westcoast Air earns on each one-way flight between San Francisco and Fiji.
Total Cost =Variable Cost + Fixed Costs
$7,500+$7,000+$53,000+$700+$14,000+$5687.5= 87,887.5
Income= Total Revenue-Total Cost
56,875-87,887.5 = -31,012.5
2. The Market Research Department of Westcoast Air indicates that lowering the average one-way fare to $280 will increase the average number of passengers per flight to 212. Should the company lower its fare? Show your calculations.
59,360.
With the former fare price, the company was getting revenue of 56,875.
Since there will be an increase in revenue due to the adjustment, it is advisable for the company to reduce the fares per flight to $280.
3. Travel International, a tour operator, approaches Westcoast Air on the possibility of chartering (renting out) its jet aircraft twice each month, first to take Travel International’s tourists from San Francisco to Fiji and then to bring the tourists back from Fiji to San Francisco. If Westcoast Air accepts Travel International’s offer, Westcoast Air will be able to offer only 184 of its own flights each year. The terms of the charter are as follows:
(a) For each one-way flight, Travel International will pay Westcoast Air $75,000 to charter the plane and to use its flight crew and ground service staff;
(b) Travel International will pay for fuel costs; and
(c) Travel International will pay for all food costs. On purely financial considerations, should Westcost Air accept Travel International’s offer? Show your calculations.
Revenue earned before the deal (per flight) is
Income earned was
=$-31,012.5
After the deal
Income earned was
75,000-53,000=22,000
This shows an increase in the revenue earned from a negative digit to a positive digit. Westcost Air Co. should therefore seriously consider taking this deal purely on the basis of increase in profit earned.
What other factors should the company consider in deciding whether or not to charter its plane to Travel International?
If Westcost opts to take this deal its standing to lose on the clientele base.
However, it is not going to be economically viable for the company to go the former option being that its major goal is making profit which the second option is offering better.
References
Larry, W. (2009). Principles of Accounting: A Complete Online Text . n.d: principlesofaccounting.com.
William, A. (1978). Principles of Accounting. New York: Ayer Publishing.
