Regional Airways, Inc., a small two-plane passenger airline, has asked for your
ID: 2428477 • Letter: R
Question
Regional 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 Regional's base airport to the major city in the state, Metropolis. Each month 40 round-trip flights are made. Shown on page 219 is a recent month's activity in the form of a cost-volume-profit income statement.Fare revenues (300 fares) $45,000
Variable costs
Fuel $14,000
Snacks and drinks 800
Landing fees 2,000
Supplies and forms 1,200 18,000
Contribution margin 27,000
Fixed costs
Depreciation 3,000
Salaries 15,000
Advertising 500
Airport hangar fees 1,750 20,250
Net income $ 6,750
If fares were decreased by 10%, an additional 100 fares could be generated. However, variable costs would increase by 35%. Should the fare decrease be adopted?
Explanation / Answer
Break-even point in $: (Fixed costs/contribution margin) x Sales revenue (20,250/27,000) x 45,000 = $33,750 Break-even number of fares: Break-even sales/fare per passenger 33,750/(45,000/300) = 225 Contribution margin at Break-even point must be equal to fixed costs, hence $20,250