Truckee Air operates 35 scheduled round-trip flights between Reno and Houston. I
ID: 2417715 • Letter: T
Question
Truckee Air operates 35 scheduled round-trip flights between Reno and Houston. It charges a fixed one-way fare of $200 per passenger. Truckee Air can carry 150 passengers per one-way flight. Fuel and other flight-related costs are $5,000 per one-way flight. On-flight meal and refreshment costs average $5 per passenger. Flight crew, ground crew, advertising, and other administrative expenditures for the Reno-to-Houston route amount to $400,750 each week. REQUIRED: 1. How many passengers must each of the 70 one-way flights have on average to break even each week? 2. If the load factor is 60% on all flights (that is, the flights are 60% full), how many flights must Truckee Air operate on this route to earn a total profit of $500,000 before taxes each week? 3. Are fuel costs fixed or variable? 4. What is the variable cost to Truckee Air for one additional passenger on a flight if the passenger takes a seat that would otherwise go empty? Truckee Air operates 35 scheduled round-trip flights between Reno and Houston. It charges a fixed one-way fare of $200 per passenger. Truckee Air can carry 150 passengers per one-way flight. Fuel and other flight-related costs are $5,000 per one-way flight. On-flight meal and refreshment costs average $5 per passenger. Flight crew, ground crew, advertising, and other administrative expenditures for the Reno-to-Houston route amount to $400,750 each week. REQUIRED: 1. How many passengers must each of the 70 one-way flights have on average to break even each week? 2. If the load factor is 60% on all flights (that is, the flights are 60% full), how many flights must Truckee Air operate on this route to earn a total profit of $500,000 before taxes each week? 3. Are fuel costs fixed or variable? 4. What is the variable cost to Truckee Air for one additional passenger on a flight if the passenger takes a seat that would otherwise go empty?Explanation / Answer
1. Break even per passenger = Total fixed cost per flight / Contribution per passenger
= 5725+5000 / 195
= 55 / passenger
Working note:
A). Advertising & other advertising expenses per week = 400750 / 70 = $ 5725
Fuel & other related cost = $ 5000
Total fixed cost per flight = $ 5725 + $ 5000 = $ 10725
B). Contribution per passenger = Revenue - variable cost
= 200 - 5 = $ 195
2. Contribution per flight = 90 (150 * 60 %) * 195 = 17550
Less : Fixed cost (5000+5750) = 10750
Profit per flight = 6800
No of flights to operated = profit to be achieved / profit per flight
= 500000 / 6800
= 74 flights
3. Fuel costs are fixed costs
4. Variable cost per additional passenger = $ 5
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