Michael Bordellet is the owner/pilot of Stellar Air Service. The company flies a daily round trip from Seattle’s Lake Union to a resort in Canada. In 2016, the company reported an annual income before taxes of $167,403, although that included a deduction of $65,000, reflecting Michael’s salary:
Revenue ($330 × 1,872 passengers) |
$617,760 |
|||||
Less costs: |
||||||
Pilot (owner’s salary) |
$65,000 |
|||||
Fuel ( 38,331 gallons × $3.98) |
152,557 |
|||||
Maintenance (variable) |
137,500 |
|||||
Depreciation of plane |
24,100 |
|||||
Depreciation of office equipment |
2,700 |
|||||
Rent expense |
41,000 |
|||||
Insurance |
20,800 |
|||||
Miscellaneous (fixed) |
6,700 |
450,357 |
||||
Income before taxes |
$167,403 |
Revenue of $617,760 reflects 6 round trips per week for 52 weeks
with an average of 6 passengers paying $330 each per round trip (6
× 52 × 6 × $330 = $617,760). The flight to the resort is 430 miles
one way. With 312 round trips (6 per week × 52 weeks), that amounts
to 268,320 miles. The plane averages 7 miles per gallon
How many round trips is Michael currently flying, and how many round trips are needed to break even?
How many round trips are needed so that Michael can draw a salary of $118,000 and still not show a loss?
What is the average before-tax profit of a round trip flight in 2016?
What is the incremental profit associated with adding a round-trip flight?
ANSWER
a. How many round trips is Michael currently flying, and how many
round trips are needed to break even?
6 per week × 52 weeks) ---------------------------- 312
Revenue per trip ($330 x 6 passengers) ----------------- $1,980
Total revenue ($1,980 per trip x 312 trips)------------------ $617,760
Variable costs:
Fuel ------------------------------------------------- $152,557
Maintenance ------------------------------------------- 137,500
Total variable costs ---------------------------------------- $290,057
Variable costs per trip ($290,057 ÷ 312) -------------------------- $929.66
Contribution margin per trip ($1,980 − $929.66) ------------------- $1050.34
Fixed costs:
Salary ------------------------ $ 65,000
Depreciation of plane ---------------- 24,100
Depreciation of office equipment ---------- 2,700
Rent --------------------------- 41,000
Insurance ----------------------- 20,800
Miscellaneous ---------------------- 6,700
Total fixed costs ------------------------------ $160,300
Break-even number of trips is ($160,300 ÷ $1050.34) = 153 trips.
b. How many round trips are needed so that Micheal can draw a salary of $118,000 and still not show loss?
the break-even number of trips is ($213,300 ÷ $1050.34)=203
c. What is the average before tax profit of a round trip flight in 2016 ?
average before tax profit per round trip = $167,403 ÷ 312 = $ 537
d. What is the incremental profit associated with adding a round trip flight?
$1050.34.
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