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

Price Charged Variable Cost per Ticket Business Pleasure

$600 $65 225 110

1,350 150 215 25

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 ALL calculations.

Explanation / Answer

A

Partciulars

A

B Price Charged $                  600 $            1,350 Less: variable cost $                    65 $               150 Contribution Margin $                  535 $            1,200 Business Pleasure Price Charged $                  600 $            1,350 $             600 $          1,350 Seast to be sold (a) $                  225 $               215 $             110 $               25 Contribution per ticket (b) $                  535 $            1,200 $             535 $          1,200 Total Contribution©= (a)*(b) $           120,375 $        258,000 $        58,850 $        30,000 For business travellers, it is better to charge the price at 1350, since there is a high contribution margin that price. For pleasure travellers, it is better to charge the price at 600, since there is high contribution margin at that price Note: Fixed cost is unavoidable and irrelevant in decision making , hence not considered

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