Problem 14-30: NorthStar Airlines runs daily commuter flights from Washington, D
ID: 353933 • Letter: P
Question
Problem 14-30: NorthStar Airlines runs daily commuter flights from Washington, D.C., to Chicago. The planes hold 60 passengers and cater to the business traveler with comparable business rates. The recent economic downturn has reduced the occupancy rate of flights to such an extent that NorthStar would like to offer a set number of seats at discount rates to gain more passengers. The board of directors is worried that discounted seats will cut into profit margins and will upset the regular business traveler. The ticket price for a business traveler is $350. Discounted tickets would sell for $120.
Assuming that empty seats can be sold if discounted, use the following data gathered from 100 flights to determine how many seats should be discounted.
Number of Full-Fare Passengers
Frequency
10
15
20
25
30
25
40
20
50
10
60
5
Number of Full-Fare Passengers
Frequency
10
15
20
25
30
25
40
20
50
10
60
5
Explanation / Answer
Cost of Shortage (Cs) = Revenue per unit = 350
Cost of excess (Ce) = Discounted price = 120
Service level = Cs/(Cs+Ce) = 350/(350+120) = 0.74
Hence, the number of full fare passengers should be above cumulative frequency of 74
So, from above table, it shows that it must be above 30. Hence, 40 passengers must be for full fare.
The number of seats for discounted fare = 60-40 = 20
Number of Full-Fare Passengers Frequency Cumulative frequency 10 15 15 20 25 40 30 25 65 40 20 85 50 10 95 60 5 100