Question

a. Assuming number of miles flown is the only cost driver, determine the profitability for the three flights selected. b. Using activity-based costing, choose an activity driver for each of the three activities and explain why you chose them. [Hint: Please provide three paragraphs, each explaining the activity driver you chose, the reasons why you chose it and the reasons why the other activity drivers were not as good as the one you chose.] Page 2 c. Using the activity drivers determined in b. above, determine the profitability for the three flights selected. d. Why are the results obtained in c. different from those obtained in a. using the Pleasant Day Airlines’ assumption that all costs vary with the number of miles flown? e. Based on your analysis and your general knowledge, what advice would you give the President for enhancing the profitability of Pleasant Day Airlines? [Hint: This is a business question - you are now asked to examine the revenues earned and expenses actually incurred to operate Pleasant Day Airlines. Hence, look at their operations and ask yourself - if I was hired as a consultant, what suggestions might I, in general, advance to improve profitability?] Pleasant Day Airlines provides passenger airline service and connects four major cities: Atlanta, Cincinnati, Chicago, and Los Angeles. Each of the airline’s seventy (70) airplanes is expected to fly 100,000 miles during the period. The following costs are budgeted for the period: Fuel costs ................................... $5,000,000 Terminal operating costs ............................. $4,000,000 Flight crew salaries...................................... $8,000,000 Total ...................................... $17,000,000 Pleasant Day Airlines’ management wants to assign these costs to individual flights in order to gauge the profitability of their service offerings. The following data from corporate records display the expected costs to operate each terminal during the period: Terminal city total cost at each terminal arrivals/departures Chicago........... $320,000............. 320 Atlanta............... $1,440,000....... 1,800 Cincinnati ................ $480,000................ 800 Los Angeles ................. $1,760,000.................... 1,000 Total .......................... $4,000,000................... 3,920 Three recent representative flights have been selected for the profitability study. Their characteristics are as follows: Description Airplane type Miles flown # of passengers Ticket price Flight 1 ....Atlanta to Los Angeles..........M-500..........1,950 ................ 8.......... $800 Flight 2 ....Atlanta to Chicago .................M-300.............600 ................ 2...........$500 Flight 3 .....Cincinnati to Atlanta..............M-200.............370 ................ 8...........$410 Required: Using the facts from the problem, please respond to the following independent questions and show all workings:

Answer 1

a)
Fuel costs	$5,000,000
Terminal operating costs	$4,000,000
Flight crew salaries	$8,000,000
Total	$17,000,000
Number of Miles Flown = 70 planes x 100,000	7,000,000	Miles
Cost per mile ​= $17,000,000/100,000 miles	$2.43	Per mile
Monthly ground Personnal
Arrival/Departure	Cost Per city	Number of arrival and Departure	Rate per city = Cost per city/No.of arrival & depart.
Chicago	$320,000	320	$1,000
Atlanta	$1,440,000	1800	$800
Cincinnati	$480,000	800	$600
Los Angeles	$1,760,000	1000	$1,760
Total	4000000	3920
Pleasant Day Airlines’
Flight Profitability Report​
For Three Representative Flights​
	Flight 1	Flight 2	Flight 3
Passenger revenue (passengers × fare)​	$6,400	$1,000	$3,280
Less: Fuel, crew, and depreciation costs (miles × $2.43 per mile)​	-$4,735.71	-$1,457.14	-$898.57
Less: Ground personnel (sum of departure + Arrival Charges) (calculated below)	-$2,560	-$1,800	-$1,400
Flight income from operations​	-$895.71	-$2,257.14	$981.43
Ground personnel (sum of departure + Arrival Charges)
Atlanta to Los Angeles = ($800+1760)	$2,560
Atlanta to Chicago = ($800+$1000)	$1,800
Cincinnati to Atlanta = ($600+800)	$1,400