13-34 Airline pricing, considerations other than cost in pricing. Costal Airways

Question

13-34 Airline pricing, considerations other than cost in pricing. Costal Airways is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round-trip tickets The market research group at Costal Airways segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents: Number of Seats Expected to Be Sold Variable Cost per Ticket $65 150 Business 225 215 Pleasure 110 25 Price Charged $600 ,350 Pleasure travelers start their travel during one week, spend at least one weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends. Assume that round-trip fuel costs are fixed costs of $18,500 and that fixed costs allocated to the round-trip flight for airplane- lease costs, ground services, and flight-crew salaries total $150,000. 1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations. Required

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A B A-B Price Charged Variable Cost Contribution Margin 600 65 535 1350 150 1200 Business Pleasure Price Charged 600 1350 600 1350 C Seast to be sold 225 215 110 25 D Contribution per ticket 535 1200 535 1200 C*D Total Contribution 120375 258000 58850 30000 High High As per above calculation, business traveller should be charged 1350 and Pleasure should be charged 600 since contribtuion is highest at this level Other cost are fixed cost and will remain same irrecspective of price charged

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