Question

A regional airline sells 200 tickets to New York City for an average price of $ 175 one way. Half of the people on the flight will purchase a meal for $5.
The airline’s employee costs per flight include $500 each for the pilot and copilot, and $200 for each flight attendant. The law requires airlines to have at least one pilot, copilot, and flight attendant for each flight. Fuel for the flight is expected to cost $8000, and the cost of catering food is $1 for each item purchased.

Part 1

The airline earns how much in revenue from tickets and how much from in-flight purchases?

If one flight attendant is staffed for the flight, the airline pays how much in fixed costs?

If the airline has three flight attendants for the flight, the firm earns how much profit?

Part 2

What happens to profit in each of the following scenarios, given the information in Part 1 above?

Scenario

Change in Profit

1. An unexpected fuel shortage results in an increase in the price of fuel for the foreseeable future.

Increase/Decrease/Stay the same?

2. A large conference is announced in New York, which results in an increase in demand for seats on flights to New York.

Increase/Decrease/Stay the same?

3. A competing airline opens a route, which increases the supply of flights to New York City.

Increase/Decrease/Stay the same?

4. The pilots' union negotiates higher wages for pilots and copilots.

Increase/Decrease/Stay the same?

Answer 1

PART 1

The Airline earns 35,000$ in revenue from tickets and 500$ from in-flight purchases.

The Airline pays 1200$ as fixed cost while staffing one flight attendant.

The Airline earns 25,800$ as profit when it carries three flight attendants.

PART 2

1 Profit would decrease with an increase in fuel price in future.

2 Profit would increase due to increased seat demands.

3 Profit would decrease due to less demand.

4 Profit would decrease due to an increase in fixed cost.

Explanation:

Stepwise solution

PART 1

Average price of each ticket= 175$ (given)

Total tickets sold= 200

Hence, total revenue from tickets= 175$ *200

                                                           = 35,000$

In flight purchase= 100 peoples (half of the people make purchase)

Revenue from each purchase= 5$

Total revenue from in-flight purchase = 500$

Fixed cost for carrying pilot= 500$

Fixed cost for carrying co-pilot= 500$

Fixed cost for carrying attendant= 200$

Given that one attendant is staffed  

Thus, total fixed cost for the flight= cost for pilot + co-pilot+ attendant

                             = 1200$

Given, the Airline staffs 3 attendant

Thus, net fixed cost= 500$ +500$ +(3*200$)

                                  =1600$

Catering charge= 1$ for each item purchased

Total item purchased = 100 (since half of the total passengers flying have purchased a meal)

Total Catering charges= 100$

Fuel Cost= 8000$

Hence, Net Expense of the Airline = net fixed cost + Total Catering charge+ Fuel cost

                                                            =1600$ +100$ +8000$

                                                            =9700$

Net Income of the Company from all sources (including in-flight purchases) = 35500$ (30,000$+500$)

Total profit earned by firm= Net Income- Net Expense

         =35,500$-9700$

      =25,800$

PART 2

1 An unexpected fuel shortage would increase the price of fuel, as a result, the net expense of the firm would increase in the foreseeable future. Thus, Profit earned by the Airline would decrease

2 A large conference would probably result in increased demands for seats as a result of which cost per seat would rise (due to dynamic tariff pricing mechanism). Hence, net income, as well as profit earned by the firm, would increase.

3 Since a competing airline has also opened the same route thus, the net demand of the ticket would fall. Resultantly price per ticket too would fall causing less revenue realisation by the firm and hence decreased profit.

4 Pilots union negotiating higher wages would increase the fixed cost of the firm resulting in increased expenses. Hence, net profit realised would decrease.