Blue Jet Airlines has an evening flight from Kansas City to Chicago with an aver
ID: 1217581 • Letter: B
Question
Blue Jet Airlines has an evening flight from Kansas City to Chicago with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers. The plane makes no other trip. The charge for the plane remaining in Chicago overnight is $1,200 and would be zero in Kansas City. The airline is contemplating eliminating the night flight out of Kansas City and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one-way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000. The fixed costs for the plane are $3,000 per day whether it flies or not. (a) Should the airline replace its night flight from Kansas City with a morning flight? (b) Should the airline remain in business?
Explanation / Answer
FC of 3000 will be incurred wheter fly or not. So it is a Sunk cost & is not relevant here.
a. Total Rev from Return trip with Night halt is
(80+50)*$200 = 26000
Less Var Cost 11000
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Total COnt 15000
Less FC-Parking 1200
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Net Profit 13800 ..............(X)
Total Rev from Return trip with No Night halt is
(70+50)*$200 = 24000
Less Var Cost 11000
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Total COnt 13000
Less FC- 0
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Net Profit 13000 ..............(Y)
As X > Y, Airline should continue with Night flight ..Ans (a)
b. Airway should continue the Night flight as it gives higher Profit which helps it recover $3000 FC of Plane