Question

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should a. drop the flight now but renew the lease if conditions improve. b. drop the flight immediately. c. continue the flight. d. continue flying until the lease expires and then drop the run.

Answer 1

Answer:

The answer is: D) continue flying until the lease expires and then drop the run.

Explanation:

Currently Cold Duck Airlines is losing money:

• revenue < total costs

It only gets $1,000 in revenue per flight but spends $1,150 per flight (net loss of $150 per flight).

They should continue flying only until the lease contract expires. Usually lease contracts apply penalties if they are terminated early. We don't know the penalty amount but still it is never good to breach a contract.