Airway Express has an evening flight from Los Angeles to New York with an averag
ID: 1095772 • Letter: A
Question
Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight the next afternoon with an aerage of 50 passengers. The plane makes no other trip. The charge for the plane remaining in New York obernight is $1,200 and would be zero in Los Angeles. The airline is contemplating eliminating the night flight out of Los Angeles and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not. (a) Calculate and compare the profit under each flight. (b) Shoul Airway Express continue providing the flight between Los Angeles and New York? Even if Airway Express decides not to fly, it still has to pay the fixed costs of $3,000 per day. The evening flight with the return flight the next afternoon is counte as 1 day, not 2 days.
Explanation / Answer
a)
Total cost for providing evening and afternoon flight
= $1200+$11000+$11000+$3000
=$ 26200
Total revenue for providing evening and afternoon flight
= 130($200)
=$26000
Total profit
= $26000-$26200
= -$200
Total cost for morning and afternoon flight
= $11000+$11000+$3000
=$ 25000
Total revenue for morning and afternoon flight
= 120($200)
= $24000
Total profit
= - $1000
b) Total variable cost for evening and afternoon flight
= $1200+ $11000+$11000
= $23200
Total variable cost for morning and afternoon flight
= $22000
Since for both cases, total revenue>total variable costs, the airways express should continue providing the flight between Los Angeles and New York until it is able to increase efficiency or find other ways to increase profits. However, in the event that total revenue
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