Question

Break-Even Sales and Sales Mix for a Service Company Zero Turbulence Airline provides air transportation services between Los Angeles, California; and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics: Fuel $11,506 Flight crew salaries Airplane depreciation Variable cost per passenger-business class 8,813 4,161 Variable cost per passenger-economy class 50 Round-trip ticket price-business class Round-trip ticket price-economy class 310 It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. If required round the answers to nearest whole number. a. Compute the break-even number of seats sold on a single round-trip flight for the overall product, E. Assume that the overall product is 20% business class and 80% economy class seats. Total number of seats at break-even seats b. How many business class and economy class seats would be sold at the break-even point? Business class seats at break-even seats Economy class seats at break-even seats

Answer 1

Fixed costs = Fuel + Flight crew salaries + Airline depreciation

= $11,506 + $8,813 + $4,161

= $24,480

Contribution margin per passenger = Price per passenger - Variable cost per passenger

Business class Contribution margin per passenger = $555 - $65 = $490

Economy class Contribution margin per passenger = $310 - $50 = $260

Weighted average Contribution margin per passenger = (Business class Contribution margin per passenger * 20%) +(Economy class Contribution margin per passenger * 80%)

= ($490 * 20%) + ($260 * 80%)

= $306

a. Total number of seats at break-even = Fixed costs / Weighted average Contribution margin per passenger

= $24,408 / $306

= 80 seats

b. Business class seats st break-even = 80 * 20% = 16 seats

Economy class seats st break-even = 80 * 80% = 64 seats