Question

MidCoast Airlines provides charter airplane services. In October of this year, the company is operating at 60% of its capacity when it receives a bid from the local community college. The college is organizing a Washington, D.C., trip for its international student group. The college budgeted only $46,000 for round-trip airfare. MidCoast Airlines normally charges between $66,000 and $76,000 for such service. MidCoast determines its cost for the round-trip flight to Washington to be $61,600, which consists of the following. Variable cost Fixed cost (allocated) Total cost $24,600 37,000 $61,600 Although the manager at MidCoast supports the college's educational efforts, she cannot justify accepting the $46,000 bid for the trip given the projected $15,600 loss. Still, she decides to consult with you, an independent financial consultant. Do you believe the airline should accept the bid from the college? What is the contribution margin from accepting the offer? Yes Should airline accept the bid from the college? Contribution margin

Answer 1

Revenue from college trip	46,000
Variable cost	-24,600
Contribution margin	$21,400

Since college trip will provide a contribution margin of $21,400, hence airline should accept the bid from the college by accepting college bid, income of airline will increase by $21,400.

By accepting college bid, there will be no increase in fixed cost and hence fixed cost are irrelevant in making a decision.

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