Fly Montana is a low-cost airlines that operates in and around the state of Mont
ID: 2736171 • Letter: F
Question
Fly Montana is a low-cost airlines that operates in and around the state of Montana. Fly Montana reduces its cost by running the flights at a lower altitude, by higher utilization, and by optimizing the personnel cost. Peter Griffin is an expert cost accountant analyzing the airlines’ cost structure for its most popular Billings to Denver route. He finds that the fixed cost for such a flight with 186 seats is $32,000 including rent and fuel. Peter knows that the variable cost is $18 per passenger and the airlines charges a fixed ticket price of $205. What should be the minimum occupancy rate so that Fly Montana do not make a loss? What will be your answer if Fly Montana decides to replace its current fleet with larger 220 seats airplanes with a fixed cost of $36,000?
Explanation / Answer
1.Calculation of minimum occupancy rate so that fly montana do not make a loss :
It is nothing but a break even of number of occupants.
Minimum occupancy rate = Fixed cost/Contribution per person
= 32000/(205-18)
= 171 (Approximately ,171.122)
If fly montana decided to replace its current fleet with fixed cost $36000 minimum occupancy rate :
Since he has given that it's a replacement old fixed cost and old capacity cant be considered.
New fixed cost = $36000
New capacity = 220seats
Minimum occupancy rate = fixed cost / Contribution per person
= $36000/187
= 193 (approximately,192.513)