Question

II. Accept or Reject a Special Offer. Jim Wright, Worldwide Airways' vice president for operations, has been approached by a Japanese tourist agency about flying chartered tourist flights from Japan to Hawaii. The tourist agency has offered Worldwide Airways $150,000 per round-trip flight on a jumbo jet. Given the airline's usual occupancy rate and air fares, a round- trip jumbo jet flight between Japan and Hawaii typically brings in revenue of $250,000. Thus, the tourist agency's specially priced offer requires a special analysis by Jim Wright. Wright knows that Worldwide Airways has two jumbo jets that are not currently being used. The airline has just eliminated several unprofitable routes, freeing these aircraft for other uses. The airline was not currently planning to add any new routes, and therefore the two jets were idle. The controller provides the information below which pertains to a typical round-trip jumbo jet flight between Japan and Hawaii. Revenue: Passenger Cargo Total Revenue $250,000 30.000 $280,000 Expenses: Variable exps. of flight Fixed exps. allocated to each flight Total Expenses $ 90,000 100.000 $190,000 Profit $ 90,000 The variable costs cover aircraft fuel and maintenance, flight-crew costs, in-flight meals and services, and landing fees. The fixed costs allocated to each flight cover Worldwide Airways' fixed costs, such as aircraft depreciation, maintenance and depreciation of facilities, and fixed administrative costs. Additionally. Worldwide Airways would not incur the variable costs of reservations and ticketing if it were to accept this special offer. These variable costs amount to $5,000 per scheduled round-trip flight. Required: Should Worldwide Airways accept or reject the special offer from the Japanese tourist agency Provide supporting computations.

Should Worldwide Airways accept or reject the special offer from the Japanese tourist agency? Provide supporting computations.

Answer 1

Answer is given below

In evaluation of special offer only relevant cost should be considered

Evaluation of Proposed Offer Price Offered $150,000 Less: Variable cost $85,000 Contribution $65,000 World wide should accept the offer Since Contribution is positive the proposal should be accepted Fixed cost is not relevant for evaluation of this proposal since it is sunk cost Variable cost relevant to evaluate this offer is $ 85,000