Question

Kennedy Intercsiding providing a new daily service between JFK (Newv each f 54. An airline company is considering providing a new da ew Yo Airport) and SLC (Salt Lake City International Airport). The rk'sJoh craft maximum capacity of 100 passengers, and of the number of passengers. In addition, a ight incurs a fixed cost of $15.00 $25 cost is incurred per passenger to co costs. The airline is considering charging $400 per ticketv (A) How many passengers will the airline arrived at your answer. need on each flight to break even? Explain (B) Provid e an explanation as to whether this new service should be added. higher or lower? Explain your answer ate the current recommended ticket price. Is there a better price, or should the airine

Answer 1

(A)Break Even point = Total Fixed Costs/Contribution Margin per Passenger

Contribution Margin per Passenger = Ticket Price – Variable Cost per Passenger

= $400 - $25

= $375

Break even point = $15,000/$375

= 40 passengers

Hence, the airline will need 40 passengers on each flight to break even

(B)The flight has a capacity of 100 passengers and the break even point is only 40 passengers, there is a scope of huge profit, hence the new service should be added.

(c) The airline should evaluate price demand relationship. Since the variable cost per passenger is as low as $25 per passenger, the airline should lower the price if it raises the occupancy.