Next week, Super Discount Airlines has a flight from New York to Los Angeles tha

Question

Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. The airline knows from past history that an average of 36 customers (with a standard deviation of 22) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $145. If the flight is overbooked, the airline has a policy of getting the customer on the next available flight and giving the person a free round-trip ticket on a future flight. The cost of this free round-trip ticket averages $240. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost. By how many seats should Super Discount overbook the flight? (Round your answer to the nearest whole number.)

Explanation / Answer

Given

Cu = $145

Co = $240

Service level = Cu /(Cu + Co )

= 145/(145+240)

= 0.3766

Service level = 37.66%

At  37.66% service level the z value is -0.3144 ( we will get z value by doing normsinv(0.3766) in excel)

seats should Super Discount overbook the flight = Mean + z * standard deviation

= 36 + (-.3144)22

= 29.08 = 29

Super Discount Airlines should overbook 29 passengers on the flight

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