Question

Sunland 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 Sunland’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		$13,390
Snacks and drinks		790
Landing fees		2,000
Supplies and forms		1,100		17,280
Contribution margin				30,720
Fixed costs
Depreciation		3,100
Salaries		13,900
Advertising		600
Airport hanger fees		1,600		19,200
Net income				$11,520

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

(1) How much would net income be impacted by this change?

Net income :    increases/decreases to $

(2) Should the ticket price decrease be adopted?: No/Yes

Answer 1

Answer:

Analysis of impact on net income If ticket prices were decreased by 10%, passenger flights would increase by 25%:

Particulars	Before changes	After changes	Increase / Decrease
No. of passenger flights (a)	400	500	100
Ticket price per passenger flights (b)	$120	$108	($12)
Fare revenue (a x b)	$48,000	$54,000	$6,000
Less: Variable costs
: Fuel ($33.475 per passenger flights)	$13,390	$16,737.50	$3,347.50
: Snacks & drinks ($1.975 per passenger flights)	$790	$987.50	$197.50
: Landing fees ( $5 per passenger flights)	$2,000	$2,500	$500
: Supplies & forms ($2.75 per passenger flights)	$1,100	$1,375	$275
Contribution margin	$30,720	$32,400	$1,680
Less: Fixed Costs
: Depreciation	$3,100	$3,100	$0
: Salaries	$13,900	$13,900	$0
: Advertising	$600	$600	$0
: Airport hanger fees	$1,600	$1,600	$0
Net Income	11,520	$13,200	$1,680

If ticket prices were decreased by 10%, passenger flights would increase by 25%, it would results in increase in net income by $1,680.

2. Yes, The ticket price decrease should be adopted.