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    Operating/production Costs Analysis

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    Q: Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 per year. Analyze which airline has lower costs, and explain your reasoning clearly. Be sure to include definitions of accounting and economic costs of operation in your analysis.

    Analyze fixed costs, Marginal Costs, Total costs, average total costs per flight volume, etc.

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    Solution Preview

    In the analysis, we assume that the Fly Right(FR) doesn't have other variable costs during operation. (as the information is not given in the posting.) Then, its marginal cost is zero.
    MC1 = VC1 = 0
    Then the price of $500,000 is treated as fixed cost of the firm, for each year, the allocated depreciation expense is then $500,000/n
    Where n is the number of life years of the airplane.
    Its annual total cost is also $500,000/n.
    FC1 = TC1 = $500,000/n
    The average total cost per flight ...

    Solution Summary

    Operating/production Costs Analysis is achieved.