As an analyst at Delta Airlines, you are asked to help the operations staff. Ope

Question

As an analyst at Delta Airlines, you are asked to help the operations staff. Operations has identified a new method of loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The current labor cost to load bags is $6 per bag. Other costs are $5 per bag. Required: a-1. What differential costs should the operations staff consider for the decision to use the new method next year? a-2. What would be the cost savings per bag using it? (Round your answer to 2 decimal places.) b. How would management use the information in requirement (a) and any other appropriate information to proceed with the contemplated use of the new baggage loading method? Differential costs would not play a significant role in management's decision. Management would use the information, but would also want to know the effect on quality. Management would make their decision based strictly on the differential costs.

Explanation / Answer

a-1) The differential costs that the operations staff should consider are mentioned below:

- The 30% saving in labor cost.

- The cost to deploy the new method.

a-2) The cost saving using it would be-$6*30%=$1.8

b. The management would deploy the system if the differential cost saving is positive i.e. the differential cost saving exceeds the differential cost of deploying the new system. However, even the effect on quality will be considered by the management.

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