Fly Montana is a low-cost airlines that operates in and around the state of Mont
ID: 2737232 • 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
Solution :
Statement of income (before replcement of current fleet)
Revenue = $38130
Less : Variable cost = $3348
Contribution margin = $34782
Less : Fixed cost = $3200
Profit = $2782
(Statement of profit after replacement of current fleet with 220 seats)
Revenue = $45100
Less : Variable cost = $3348
Contribution margin = $41752
Less : Fixed cost = $36000
Profit = $5752
Comparision of profit:
Profit before replcement of current fleet = $2782
profit after replcement of current fleet = $5752
Hence,
The minimum occupancy rate should be $205