Question

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		$17,210
Snacks and drinks		760
Landing fees		2,100
Supplies and forms		1,050		21,120
Contribution margin				26,880
Fixed costs
Depreciation		2,900
Salaries		15,260
Advertising		400
Airport hanger fees		1,600		20,160
Net income				$6,720

a) Calculate break even point in dollars

b)Calculate the break even point in number of passenger flights

c) Without calculations, determine the contribution margin at the break even point

c2) If ticket prices were decreased y 10%, passenger flights would increase by 25%. However total variable costs would increase by the same percentage as passenger flights

How much would net income be impacted by this change?

Net income__________increase/decrease to $_____________

Should the ticket price decrease be adopted?

Answer 1

	Break even point =		Fixed cost/contribution margin
			Contribution margin =			Contribution margin
						Sales
						26,880	=	56%
						48,000
1)	Break even point		20160/56%
		$	36000	Answer
2)	Break even		300	Flights
				Fixed cost/contribution margin per unit
				contribution margin per unit=			contribution/passenger flights
							26880/400
							67.2
3)	Break even point		20,160	answer
	(At break even point contribution is equal to fixed cost
4)	Ticket prices		48000/400=			120
	now decrease in price					10%
	New ticket price					108
	passenger flights		400*125%=			500
	New variable cost		52.8*125%=			66
	New contribution margin			108-66
				42
	total contribution margin			(500*42)		21000
	less fixed cost					20,160
	net income(new)					840
	net income will decrease by			5880	(original net income - new net income)