Question

AirOxford owns one jet and operates flights between Oxford and the Fiji Islands. Flights leave Oxford on Mondays and Thursdays and return to Oxford from Fiji on Wednesdays and Saturdays; there is only one flight on each of these days. AirOxford cannot offer any more flights between Oxford and Fiji. Only economy-class seats are available on its plane. All tickets are booked through local travel agents. The following information pertains to AirOxford’s operation.

Plane’s seating capacity 360 passengers

Average number of passengers per flight 200 passengers

Flights per week (one-way) 4 flights

Flights per year (flights per week x 52 weeks) 208 flights

Average one-way air fare $500 per passenger

Fuel costs $70 per passenger

Food and beverage service costs (all paid by AirOxford, no charge to passengers) $20 per passenger

Commission paid to travel agents by AirOxford 8% of fare

Fixed annual lease costs, allocated to each flight $53,000 per flight

Fixed annual ground service costs (maintenance, check in, baggage handling), allocated to each flight $7,000 per flight

Fixed annual flight crew salaries, allocated to each flight $4,000 per flight

Required: 1. Based on the average number of seats occupied, calculate the contribution margin (CM) that AirOxford earns for each one-way flight (i.e., per-flight CM, not per-passenger CM) between Oxford and Fiji.

2. The Market Research Department of AirOxford indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 220. Considering the financial impact, should AirOxford lower its fare?

3. Travel International, a tour operator, approaches AirOxford on the possibility of chartering (renting out) AirOxford’s plane twice each month, first to take Travel International’s tourists from Oxford to Fiji and then to bring them back. If AirOxford accepts Travel International’s offer, AirOxford will be able to offer only 184 (208 – 24) of its own flights each year. The terms offered by Travel International are as follows: a. For each one-way flight, Travel International will pay AirOxford $75,000 to charter the plane and to use its flight crew and ground service; b. Travel International will pay for fuel costs; c. Travel International will pay for all food costs. On purely financial considerations, should AirOxford accept Travel International’s offer? (this offer should be evaluated based on the original information provided; not the information pertaining to part 2.)

4. What other factors should AirOxford consider in deciding whether to keep operations as is (option 1) or charter its plane to Travel International (option 3)?

Answer 1

PAGE NO.: DATE: 1 1 Calculation of contribution Margin per Flight Part culars. Aust-in & per flight 500 One way fall per passenger (Revenue) Less - Daciable Costs - Fuel costs 70 - Food & Beverage service costs 20 - Commission pead to travel agents 40 ($500x 87.). contribution Margin per flight 370 рел роллијали x No Average no. of Passengers 200 Total contribution Margin Per Flight 76.000 per fassenget Note: - since annual leare corts, ground service costs and crew salaces are fixed in nature they are not considered in above calculation. ]

PAGE NO.: DATE: 1 (2) Calculation Revised con of contribution Mougin Particulars Amount in $ per Flight 480 70 20 38.4 Revenue (fare changed). Less variable costs - Fuel costs - F8 B - Commission ( 480x8%) Contribution Margin Per Passenger x No. o4 x Веллз - Total contribution Margin Per Flight 351.6 220 77,352 since there is a increase in total contribution margin by the 83,352, Aroxford should lower its fare

GENO lation of Travel Intill's Propocal @ wri Profit calce Intl Proposal Amitind (500x200x. 20,80o, oco - napt calculation without Travel Particulars Revenue (face) (500 x 200 x 208) len: Variable costs fuel cost ( 70 x 200 x 2057 E8 B costs ( 20 x 200 x 208) Comwussion (2.0 SOD, 00D x 89.) contribution Margin (ess - tixed costs Lease costs (53000 x 208) 4 round service costs (7000 x 208) Crew Salaries (4000 x 209) - Net Profit 2,912,000 832,000 1,6640w 15,392,00 11,024,000 1.456,000 832,00 2.080.000 Calculation with Travel Intl. Proposal Particulars Revenue (fare) (500x 200 x 184 ) Rental income fum Travel Int (75000X24) Total income Ant in & 1 18,400,000 1,800.000 20,200,000 I less: Variable costs fuel coct (70X 200x 284. F8 B costs (20 x 200 x 184 ) - Commission (18,400,0w x 81) Contribution Mongin fixed cost Сели Cotats 200х2 Ground service cost Cow falacier 2,576,000 736,000 1 472,oo 15,416,00 11,024 oco 1.456 000 832.000

PAGE NO.: DATE: / 2,104,000 Net Profit since there is increase in net profit by $24,000, so Arroxford should accept Travel Int'l proposal. Note: - Fixed costs will not change as they are mere allocation and are allocated per tight so don't change in totality and thus are maintained at existing levels. Non financial factors 10 Genuinity of peoposal from Travel Is to as if the agreement is breached the whole financial pro implications will differ. If Air Oxford can grow its business very well in rear future then it should take into account that growth of no of passengers.