Question

Problem 11-5 (Algo) Next week, Super Discount Airlines has a flight from New York to Los Angeles that will be booked to capacity. The airline knows from history that an average of 25 customers (with a standard deviation of 13) cancel their reservation or do not show for the flight. Revenue from a ticket on the flight is $135. If the flight is overbooked, the airline has a policy of getting the customer on the next available flight and giving the person a free round-trip ticket on a future flight. The cost of this free round-trip ticket averages $218. Super Discount considers the cost of flying the plane from New York to Los Angeles a sunk cost. By how many seats should Super Discount overbook the flight? (Use Excel's NORM.S.INV() function to find the z value. Round z value to 2 decimal places. Round your answer to the nearest whole number.) Overbook by

Answer 1

Cost of underbooking, Cu = $135

Cost of overbooking, Co = $218 (Paid for free round-trip)

Critical ratio = Cu / (Cu+Co) = 135 / (135+218) = 0.3824

For this critical ratio, Z score= -0.30

Optimal overbooking = Mean + Z*Standard deviation = 25 + 13*0.30 = 28.9 = 29 seats