Exercise 20-4 Comfi Airways, Inc., a small two-plane passenger airline, has aske
ID: 2394230 • Letter: E
Question
Exercise 20-4 Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi's base airport to the major city in the state, Metropolis. Each month 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement. $50,400 Fare revenues (400 fares) Variable costs Fuel Snacks and drinks Landing fees Supplies and forms $18,366 740 1,950 1,120 22,176 28,224 Contribution margin Fixed costs Depreciation Salaries Advertising Airport hanger fees 3,030 14,172 570 1,660 19,432 $8,792 Net income (a) Calculate the break-even point in (1) dollars and (2) number of fares. (Round answers to 0 decimal place, e.g. 1,225.) Break-even point 2. Break-even point (b) Without calculations, determine the contribution margin at the break-even point. Break-even point (c) If fares were decreased by 10%, an additional 100 fares could be generated. However, total variable costs would s fares increase by 20%. (Round answers to 0 decimal place, eg. 1,225.) (1) How much would net income be impacted by this change? Net income to $ (2) Should the fare decrease be adopted? Click if you would like to Show Work for this question: Open Show WorkExplanation / Answer
a). Breakeven point = Fixed Cost / Contribution per fare
Contribution per fare = Total Contribution / No. of fares = $28224 / 400 = $70.56
2). Breakeven point in fares = $19432 / 70.56 = 275.40 or 275 rounded off.
1). Breakeven point in $ = Fixed Cost + Variable Cost = $19432 + $22176 = $41,608.
b). Contribution margin at breakeven point = Fixed Cost = $19432
At breakeven point there is no profit hence contribution is equal to fixed cost.
c). If fares were decreased by 10%.
Fare Revenue = $50400*90% = $45360 / 400 * 500 = $56,700.
Less: Variable Cost = $22176 * 120% = $26611.2
Less: Fixed Cost = $19432
Net Income = $10656.8
Net Income increased.
2). Hence the fare decrease should be adopted.
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