MODULE 5 - CASE

Module 5 - Case

Module 5 - Case

Question 1. Calculate the operating income that West coast Air earns on each one-way flight between San Francisco and Fiji.

Solution:

Average one-way fare per passenger $ 325

Commission at 10% of $325 32.5

Net cash to Air Frisco per ticket $ 292.5

Average number of passengers per flight x 175

Revenues per flight ($292.5 x 175) $ 51,187.5

Food & beverage cost per flight ($4 x 175) 700

Total contribution from passengers 50,487.5

Fuel costs per flight 14,000

Contribution per flight 36,487.5

Fixed costs allocated to each flight:

Lease costs $53,000

Baggage handling 7,500

Flight crew 7,000 67,500

Operating income/loss per flight -$31,012.5

 

Question 2.The Market Research Department of West coast 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.

Solution:

If fare is $280.00

Commission at 10% of $280 28.00

Net cash per ticket 252

Food and beverage cost per ticket 4.00

Contribution per passenger $248.00

Total contribution margin from passengers

($248 x 212) $52,576

All other costs are irrelevant

On the basis of quantitative factors alone, Air Frisco should decrease its fare to $280 because reducing the fare gives Air Frisco a higher contribution margin from passengers ($52,576 versus $50,487.5).

Question 3.Travel International, a tour operator, approaches West coast 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 West coast Air accepts Travel International's offer, West coast Air will be able to offer only 184 (208 - 24) of its own flights each year. The terms of the charter are as follows: (a) For each one-way flight, Travel International will pay West coast 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 West coast Air accept Travel International's offer? Show your calculations. What other factors should the company consider in deciding whether or not to charter its plane to Travel International?

Solution:

In evaluating whether Air Frisco should charter its plane to Travel International, we compare the charter alternative to the solution in requirement 2 because requirement 2 is preferred to requirement 1.

Under requirement 2, Air Frisco gets $52,576

Deduct fuel costs 14,000

Total contribution per flight $38,576

 

Air Frisco gets $75,000 per flight from chartering the plane to Travel International. On the basis of quantitative financial factors Air Frisco is better off chartering the plane, instead of lowering its own fares.

Other qualitative factors that Air Frisco should consider in coming to a decision are:

The lower risk from chartering its plane relative to the uncertainties regarding the number of passengers it might get on its scheduled flights.

Chartering to Travel International means that Air Frisco would not have a regular schedule of flights each week. This arrangement could cause inconvenience to some of its passengers...