Cost-volume-profit analysis for Provincial Airlines

Cost-volume-profit analysis

Provincial Airlines is a small local carrier that operates passenger flights between the Atlantic provinces. 100% Newfoundland and Labrador owned, the airline services 13 destinations throughout Newfoundland and Labrador. After experiencing healthy early profits, the company has recently been beset by instability and a string of quarterly losses. Management at the company has engaged you to provide some assistance with planning and decision-making. At an initial meeting, you were able to obtain the following data:

All seats are economy
Average full passenger fare = $150
Number of seats per plane = 120
Average load factor (seats occupied) = 70%
Average variable cost per passenger = $40
Fixed operating costs per month = $1,800,000

Specifically, you have been asked for the following:

(a) What is the breakeven point in passengers and revenues?

(b) What is the breakeven point in number of flights?

(c) If Provincial Airlines raises its average full passenger fare to $200, it is estimated that the load factor will decrease to 55%. What will be the breakeven point in number of flights in this event?

(d) The cost of fuel is a significant variable cost to any airline. If fuel charges increase by $8 per barrel, it is estimated that the variable cost per passenger will rise to $60. In this case, what will be the new breakeven point in passengers and in number of flights?

(e) Provincial Airlines management forecasts an imminent increase in variable cost per passenger to $50 and an increase in total fixed costs to $2,000,000. In response, the company is contemplating raising the average fare to $180. What number of passengers would be needed to generate an after-tax profit of $600,000 if the tax rate is 40%?

(f) Provincial Airlines is considering offering a discounted fare of $120, which the company feels would increase the load factor to 80%. Only the additional seats would be sold at the discounted fare. Additional monthly advertising costs would be $100,000. How much before-tax profit would the discounted fare provide Provincial if the company has 40 flights per day, 30 days per month?

(g) Provincial has an opportunity to obtain a new route to Port Hope Simpson. The company feels it can sell seats at $175 on the route, but the load factor would be only 60%. The company would fly the route 20 times per month. The increase in fixed costs for additional crew, additional planes, landing fees, maintenance and so on, would total $100,000 per month. Variable cost per passenger would remain at $40 according to estimates.

I. Should the company obtain the route?
II. How many flights would Provincial need to earn before-tax profit of $57,500 per month on this route?
III. If the load factor could be increased to 75%, how many flights would the company need in order to earn before-tax profit of $57,500 per month on this route?
IV. What qualitative factors should Provincial consider in making its decision about acquiring this route?