Break-Even Sales and Sales Mix for a Service Company Southwest Blue Airways prov

Question

Break-Even Sales and Sales Mix for a Service Company

Southwest Blue Airways provides air transportation services between Seattle and San Diego. A single Seattle to San Diego round-trip flight has the following operating statistics:

It is assumed that the fuel and landing fees, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall product. Assume that the overall product is 10% business class and 90% economy class tickets.

b. How many business class and economy class seats would be sold at the break-even point?

Break-Even Sales and Sales Mix for a Service Company

Southwest Blue Airways provides air transportation services between Seattle and San Diego. A single Seattle to San Diego round-trip flight has the following operating statistics:

Fuel and landing fees $9,080 Flight crew salaries 6,955 Airplane depreciation 3,285 Variable cost per passenger—business class 45 Variable cost per passenger—economy class 35 Round-trip ticket price—business class 555 Round-trip ticket price—economy class 285

It is assumed that the fuel and landing fees, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall product. Assume that the overall product is 10% business class and 90% economy class tickets.

Total number of seats at break-even seats

b. How many business class and economy class seats would be sold at the break-even point?

Business class seats Economy class seats

Explanation / Answer

a.total number of seats to break even = total fixed cost / composite contribution per seat.

here,

total fixed cost = $9,080 + $6,955 +$3,285 =>$19,320.

contribution per seat of business class = ($555 -$45) =>$510.

contribution per seat of economy class = ($285 -$35)=>$250.

composite contribution = [0.10 *($510)] + [0.90 *($250)]............(since the sales mix is 10% :90%)

=>[$51 + $225]

=>$276.

now,

break even seats = $19,320 / $276

=>70 seats.

b.

note: number of business class seats at break even point = 70 seats * 10% =>7 seats.

number of economy class seats at break even point = 70 seats * 90% =>63 seats.

total number of seats to break even 70 seats

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