Question

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 35 customers (with a standard deviation of 24) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $134. 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 $263. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost.

Answer 1

Answer:

25 seats

Explanation:

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

First step is to calculate the Critical ratio=

Using this formula

Critical ratio=Cu/Cu+Co

Where,

Cu represent cost of underetimating the demand =$134

Co represent the cost of overestimating the demand $263

Let plug in the formula

Critical ratio=$134/$134+$263

Critical ratio=$134/397

Critical ratio=0.3375

Second step is to find the z-score that yields a p-value of 0.3375 using excel's normsinv() function which gives us -0.4193.

Now let determine how many seats should Super Discount overbook the fight

Numbers of seats to overbook the fight=35+ (-0.4193 x 24)

Numbers of seats to overbook the fight= 35 - 10.0632

Numbers of seats to overbook the fight = 24.9368

Numbers of seats to overbook the fight = 25

(Approximately)

Therefore the numbers of seats that super discount airlines should overbook the flight is 25 seats.