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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?

Solution Preview

Your tutorial is in Excel. Click in cells to see formula and computation.

For the qualitative factors (last question):

 Qualitative factors would includes whether ...

Solution Summary

Your tutorial is in Excel. Click in cells to see formula and computation. A paragraph on qualitative factors is also included.

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