Question

Zero Turbulence Airline provides air transportation services between Los Angeles, California; and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:
Fuel $11,506
Flight crew salaries 8,813
Airplane depreciation 4,161
Variable cost per passenger—business class 45
Variable cost per passenger—economy class 35
Round-trip ticket price—business class 515
Round-trip ticket price—economy class 285

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. If required round the answers to nearest whole number.

Required:
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?

Answer 1

Answer:

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.

• 90 tickets

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

• business class = 9 tickets
• economy class = 81 tickets

Explanation:

Fixed costs:

• Fuel $11,506
• Flight crew salaries $8,813
• Airplane depreciation $4,161
• Total $24,480

Variable costs:

• Variable cost per passenger - business class 45
• Variable cost per passenger - economy class 35

Contribution margin:

• Business class ticket = $515 - $45 = $470
• Economy class ticket = $285 - $55 = $250

Weighted average contribution margin:

• (10% x $470) + (90% x $250) = $272

break even point in units = $24,480 / $272 = 90 seats

business class = 90 x 10% = 9 seats

economy class = 90 x 90% = 81 seats