Question

g Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi’s base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month’s activity in the form of a cost-volume-profit income statement. Fare revenues (400 passenger flights) $48,000 Variable costs Fuel $16,960 Snacks and drinks 720 Landing fees 2,100 Supplies and forms 1,100 20,880 Contribution margin 27,120 Fixed costs Depreciation 3,100 Salaries 11,600 Advertising 600 Airport hanger fees 1,650 16,950 Net income $10,170 Calculate the break-even point in dollars. Break-even point $Type your answer here eTextbook and MediaAssistance Used Calculate the break-even point in number of passenger flights. Break-even point Type your answer here flights eTextbook and MediaAssistance Used Without calculations, determine the contribution margin at the break-even point. Break-even point $Type your answer here eTextbook and MediaAssistance Used If ticket prices were decreased by 10%, passenger flights would increase by 25%. However, total variable costs would increase by the same percentage as passenger flights. (1) How much would net income be impacted by this change? Net income to $ (2) Should the ticket price decrease be adopted?

Answer 1

Answer:

Comfi Airways, Inc.

a. Break-even point in sales dollars = $30,000

b. Break-even point in passenger flights = 250

c. Contribution at break-even point = fixed costs = $16,950

d. Net income will increase to $10,950 (an increase of $780).

e. Yes.  The ticket price decrease should be adopted.

Explanation:

a) Data and Calculations:

Number of airplanes = 2

Maximum number of passengers per flight = 10

Number of round-trip flights each month = 40

Number of passenger flights = 400 (40 * 10)

                                               Total          Unit

Fare revenues                    $48,000       $120 ($48,000/400)

Variable costs:

Fuel                     $16,960

Snacks and drinks     720

Landing fees           2,100

Supplies and forms 1,100     20,880       $52.20 ($20,880/400)

Contribution margin             27,120        $67.80 ($27,120/400)

Fixed costs:

Depreciation             3,100

Salaries                    11,600

Advertising                 600

Airport hanger fees 1,650 $16,950

Net income                          $10,170

Contribution margin ratio = $67.80/$120 = 0.565

Break-even point in sales dollars = Fixed costs/Contribution margin ratio

= $16,950/0.565

= $30,000

Break-even point in sales units = Fixed costs/Contribution per unit

= $16,950/$67.80

= 250 passenger flights

Contribution at break-even point = Fixed costs = $16,950

Decrease of ticket prices by 10% from $120 to $108 ($120 * 90%)

Passenger flights increased to 500 (400 * 1.25)

Fare revenues = $54,000 (500 * $108)

Total variable costs increased to $26,100 ($20,880 * 1.25)

Contribution = $27,900

Fixed costs = $16,950

Net income = $10,950

Increase in net income = $780 ($10,950 - $10,170)