Question

Problem 11-5 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 40 customers (with a standard deviation of 26) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $140. 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 $270. 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? (Use Excel's NORMSINV() function to find the correct critical value for the given α-level. Do not round intermediate calculations. Round your answer to the nearest whole number.) Overbooked by passengers

Answer 1

Answer:

29 Seats

Explanation:

Calculation to determine By how many seats should Super Discount overbook the flight

First step is to calculate the Critical ratio using this formula

Critical ratio=Cu/Cu +Co

Where,

Cu represent cost of underestimating the demand =$140

Co represent the cost of overestimating the demand =$270

Let plug in the formula

Critical ratio=$140/$140+$270

Critical ratio=$140/$410

Critical ratio=0.34146

Second step is to use Excel's NORMSINV() function to find thez-score that yields a p-value of 0.34146 which gives us -0.40848

Now let determine By how many seats should Super Discount overbook the flight

Numbers of seats to overbook the flight= 40 + (-0.40848 x 26)

Numbers of seats to overbook the flight=40 - 10.62048=

Numbers of seats to overbook the flight=29.37952

Numbers of seats to overbook the flight=29.4 seats (Approximately)

Numbers of seats to overbook the flight=29 seats (Rounded to the nearest whole number)

Therefore By how many seats should Super Discount overbook the flight is 29 seats