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Cost Allocation For Airlines

Jarmon Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail, Inc. Never-Fail is a multimillion dollar company started by Peter Never immediately after he failed to finish his first accounting course. The company's motto is "We Never-Fail to Deliver Your Package on Time" When Never-Fail has more freight than it can deliver, it pays Jarmon to carry the excess. Jarmon contracts with independent pilots to fly its planes on a per-trip basis. Jarmon recently purchased an airplane that cost the company $24,000,000. The plane has an estimated useful life of 100,000,000 miles and a zero salvage value. During the first week in January, Jarmon flew two trips. The first trip was a round trip flight from Chicago to San Francisco, for which Jarmon paid $500 for the pilot and $350 for the fuel. The second flight was a round trip from Chicago to New York. For this trip, it paid $300 for the pilot and $150 for fuel. The round trip between Chicago and San Francisco is approximately 4,400 miles and the round trip between Chicago and New York is 1,600 miles.

A. Identify the direct and indirect costs that Jarmon incurs for each trip.

B. Determine the total cost of each trip.

C. In addition to depreciation, identify three other indirect costs that may need to be allocated to determine the cost of each trip.

Please help and explain everything. Thank you.

Solution Preview

A. The direct costs of each flight are the costs directly allocable only to that flight. In these cases, the pilots' fees and the fuel costs are direct costs. The indirect costs are costs which are paid to generally operate a business, but which benefit the projects as well. These costs can be pinpointed to a particular project, so they are ...

Solution Summary

This solution discusses and illustrates direct and indirect cost allocation for trips taken by an airplane.