Comfi Airways, Inc., a small two-plane passenger airline, has asked for your ass

Question

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.

$7,168

If fares were decreased by 10%, an additional 100 fares could be generated. However, total variable costs would increase by 20%. (Round answers to 0 decimal place, e.g. 1,225.)

(1) How much would net income be impacted by this change?

Fare revenues (400 fares) $47,100 Variable costs     Fuel $16,954     Snacks and drinks 770     Landing fees 1,940     Supplies and forms 1,060 20,724 Contribution margin 26,376 Fixed costs     Depreciation 3,050     Salaries 14,088     Advertising 420     Airport hanger fees 1,650 19,208 Net income

$7,168

Explanation / Answer

Amount $ Fare revenues (500 fares*105.975)          52,988 Variable costs     Fuel (500*50.862)          25,431     Snacks and drinks (500*2.31)            1,155     Landing fees (500*5.82)            2,910     Supplies and forms (500*3.18)            1,590 Contribution margin          21,902 Fixed costs     Depreciation            3,050     Salaries          14,088     Advertising                420     Airport hanger fees            1,650 Net income            2,694 Net Income will be reduced by $4,474 ($7,168-$2,694) Workings New fare per head = (47100/400)-10% = 105.975 New Fuel cost per unit = (16954/400)+20% = 50.862 New Snacks & drinks cost per unit = (770/400)+20% = 2.31 New landing fees per unit = (1940/400)+20% = 5.82 New supplies & forms per unit = (1060/400)+20% = 3.18

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