Question

Product Costing and Decision Analysis for a Service Company

Blue Star Airline provides passenger airline service, using small jets. The airline connects four major cities: Charlotte, Pittsburgh, Detroit, and San Francisco. The company expects to fly 170,000 miles during a month. The following costs are budgeted for a month:

Fuel	$2,120,000
Ground personnel	788,500
Crew salaries	850,000
Depreciation	430,000
Total costs	$4,188,500

Blue Star management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs:

Airline Cost	Activity Base
Fuel, crew, and depreciation costs	Number of miles flown
Ground personnel	Number of arrivals and departures at an airport

The size of the company's ground operation in each city is determined by the size of the workforce. The following monthly data are available from corporate records for each terminal operation:

Terminal City			Ground Personnel Cost				Number of Arrivals/Departures
Charlotte				$256,000				320
Pittsburgh				97,500				130
Detroit				129,000				150
San Francisco				306,000				340
	Total			$788,500				940

Three recent representative flights have been selected for the profitability study. Their characteristics are as follows:

	Description	Miles Flown		Number of Passengers		Ticket Price per Passenger
Flight 101	Charlotte to San Francisco	2,000		80		$695.00
Flight 102	Detroit to Charlotte	800		50		441.50
Flight 103	Charlotte to Pittsburgh	400		20		382.00

Required:

1. Determine the fuel, crew, and depreciation cost per mile flown.
$ per mile

2. Determine the cost per arrival or departure by terminal city.

Charlotte	$
Pittsburgh	$
Detroit	$
San Francisco	$

3. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs. Enter all amounts as positive numbers, except for a negative income from operations.

Blue Star Airline
Flight Profitability Report
For Three Representative Flights
	Flight 101	Flight 102	Flight 103
Passenger revenue	$	$	$
Fuel, crew, and depreciation costs	$	$	$
Ground personnel
	$	$	$
Flight income from operations	$	$	$

4. Evaluate flight profitability by determining the break-even number of passengers required for each flight assuming all the costs of a flight are fixed. Round to the nearest whole number.

Flight		Approximate Break-Even in Number of Passengers
101		passengers
102		passengers
103		passengers

Answer 1

Solution:-

1. Determine the fuel, crew, and depreciation cost per mile flown.

per mile

total cost = $850,000 +$2,120,000 +$430,000

                  =$3,400,000/170,000

                =$20 per mile

2)

2. Determine the cost per arrival or departure by terminal city.

Terminal city	Ground personnel cost	No of arrival/departures	Cost per arrive
Charlotte	$256,000	320	$800
Pittusburgh	97,500	130	$750
Detroit	129,000	150	$860
San Francisco	306,000	340	$900

3)

	Flight 101	Flight 102	flight 103
Sales	$55,600	$22,075	$7640
Less: Expense
Fuel & crew and dep @20	(40,000)	(16,000)	(8000)
Ground personnel cost	(1700)	(1660)	(1550)
tota cost	($41,700)	($17,660)	($9550)
income	$13,900	$4,415	(1910)

4) Break even = Fixed cost

Let number of passengers be X

flight101         41,700/695   = 60 passengers

Flight 102       17,660/441.50 = 40 passengers

Flight 103        9550/382       = 25 passengers