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    Break-Even Point and Cost Accounting

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    Please check the attached file. The question is on Cost Accounting related with Contribution margin.

    Because of the opportunities created for competition by the merger between Air Canada and Canadian Airlines, East-West Air is about to introduce a daily round-trip flight on the Toronto-to-Vancouver route. East-West Air offers only one class of seats, Comfort Class, which provides more leg room, on all its flights. No other airline offers this kind of seat. East-West is in the process of determining how it should price its round-trip tickets. The following information is available:
    Seating capacity per plane 360
    Maximum expected demand for seats on any flight 300
    Food and beverage service cost for a round trip

    (no additional charge to passenger) $40/passenger
    Commission to travel agents paid by East-West on each ticket

    (assume all tickets are booked by travel agents) 8% of fare
    Fuel costs for a round-trip flight $24,000
    Fixed annual lease costs allocated to a round-trip flight $100,000
    Fixed ground-services costs (maintenance, check-in, baggage handling)

    allocated to a round-trip flight $10,000
    Fixed flight crew salaries allocated to a round-trip flight $8,000
    For simplicity, assume that fuel costs are not affected by the actual number of passengers on a flight.

    The market research group at East-West segments the market into business travellers and pleasure travellers and provides the following information on the effect of different price levels on the estimated demand for seats on any given flight:

    Number of Seats Expected to be Sold

    Business travellers $500


    Pleasure travellers $500

    Assume these prices are the only choices available to East-West. The market research team offers one additional piece of information: Pleasure travellers usually begin their travels in one week, spend at least a weekend at their destination, and return in a following week. Business travellers usually begin and complete their travels within the same week and do not stay over a weekend.

    Question:- What is the breakeven volume for each type of passenger on a given return flight, if you assume that the fare is $2000 and that the sales mix of 190 business passengers to 20 pleasure travellers is maintained?

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    Solution Preview

    Total Fixed Cost for a round trip flight:

    Fuel costs for a round-trip flight $24,000
    Fixed annual lease costs allocated to a round-trip flight $100,000
    Fixed ground-services costs (maintenance, check-in, ...