Question

Exercise 19-04 Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Camfi's base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement. $48,000 $13,460 720 1,900 1,200 Fare revenues (400 passenger flights) Variable costs Fuel Snacks and drinks Landing fees Supplies and forms Contribution margin Fixed costs Depreciation Salaries Advertising Airport hanger fees Net income 17,280 30,720 2,950 18,090 300 1,700 23,040 $7,680 Calculate the break-even point in dollars. Break-even point Calculate the break-even point in number of passenger flights. Break-even point flights Without calculations, determine the contribution margin at the break-even paint. Break-even point If ticket prices were decreased by 10%, passenger flights would increase by 25%. However, total variable costs would increase by the same percentage as passenger flights. (1) How much would net income be impacted by this change? Net Income (2) Should the ticket price decrease be adopted? .

Answer 1

Break even point in dollars = fixed cost /PV ratio

Where PV ratio = contribution margin /sales revenue

= $30720/$48000

= 0.64

Therefore,

Break even point in dollars = $23040/0.64

= $36000

Break even point in units = fixed cost /contribution margin per unit.

Where,

Contribution margin per unit = total contribution margin /number of units sold.

= $30720/400

= $76.8 per passenger flight

Therefore,

Break even point in units = $23040/$76.8

= 300 passenger flights

Contribution margin at break even point = fixed cost = $23040.

1) Net income increases by $1680.

2) Yes, because it results in increased net income.

Solution :

Statement showing effect on net income :

	Amount
Sales	$54000
(-) Variable cost	$21600
Contribution margin	$32400
(-) Fixed cost	$23040
Net income	$9360

Therefore,

Net income increases by $1680 ($9360-$7680)

Note 1: calculations of new sales revenue -

New selling price = ($48000/400) - 10%

= $120 - 10%

= $108

New passenger flights = 400 + 25%

= 500 passenger flights

New sales revenue = 500 × $108 = $54000

Note 2: calculations of new variable cost -

New total variable cost = $17280 + 25% = $21600