Question

aint and tement E6.4 (LO 1), AP Service Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi's base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement

Answer 1

ANSWER:

(a)

Contribution margin per unit = contribution margin/total sales units

= $30,000/400

= $75

Contribution margin ratio = contribution margin/sales

= $30000/$48000 = 62.5%

Break even point (dollar sales) = fixed expenses/contribution margin ratio

= $20250/62.5%

= $32400

Break even point (unit sales) = fixed expenses/contribution margin per unit

= $20250/$75

= 270 units

(b)

contribution margin at break even point is always equal to fixed expenses.

therefore contribution margin = $20250

(c)

new ticket price = ($48000/400) x 90% = $108

new number of passenger flights = 400 x 125% = 500

new total variable cost = $18000 x 125% = $22500

therefore,

net income = (500 x $108) - $22500 - $20250

= $11250

CONCLUSION:

The ticket price decrease should be adopted because net income is increased by $11250 - $9750 = $1500