Question

Comh 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 Com's base airport to the major city in the state, Metropolis. Each month, 40 round-trip fights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement $60,000 $22,190 710 1,800 1,100 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 25,800 34,200 3,000 12,000 300 1,800 17.100 $17.100 Cakulate the break-even point in dollars Break-even point $ Calculate the break-even point in number of passenger flights. Break-even point flights SAMSUNG Without calculations, determine the contribution margin at the break-even point. 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 to $ (2) Should the ticket price decrease be adopted?

Answer 1

Contribution margin ratio= Contribution margin*100/Sales

= $34200*100/60000

= 57%

Break even point in dollar= Fixed cost/Contribution margin ratio

= $17100/57%= $30000

Break even point

$30000

Contribution margin per unit= Contribution margin/Number of passenger flights

= $34200/400= $85.5 per unit

Break even point in dollar= Fixed cost/Contribution margin per unit

= $17100/85.5= 200

Break even point

200

flights

Contribution margin at break even point= Fixed cost= $17100

At the break even point, there is neither profit nor loss and it can only happen when the contribution margin and the fixed costs will be same.

Break even point

$17100

1) Current sales price= $60000/400= $150

New sales price= $150*90%= $135

New passenger flights= 400*1.25= $500

New variable costs= $25800*1.25= $32250

Net income= Sales-Variable costs-Fixed costs

= ($135*500)-32250-17100

= $18150

Net income

increases

to

$18150

2) Yes, the ticket price decrease should be adopted as the net income will increases when the price of the ticket will decreases.

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