Question

Michael Bordellet is the owner/pilot of Stellar Air Service. The company flies a daily round trip from Seattle’s Lake Union to a resort in Canada. In 2016, the company reported an annual income before taxes of $167,403, although that included a deduction of $65,000, reflecting Michael’s salary:

Revenue ($330 × 1,872 passengers)					$617,760
Less costs:
	Pilot (owner’s salary)		$65,000
	Fuel ( 38,331 gallons × $3.98)		152,557
	Maintenance (variable)		137,500
	Depreciation of plane		24,100
	Depreciation of office equipment		2,700
	Rent expense		41,000
	Insurance		20,800
	Miscellaneous (fixed)		6,700		450,357
Income before taxes					$167,403

Revenue of $617,760 reflects 6 round trips per week for 52 weeks with an average of 6 passengers paying $330 each per round trip (6 × 52 × 6 × $330 = $617,760). The flight to the resort is 430 miles one way. With 312 round trips (6 per week × 52 weeks), that amounts to 268,320 miles. The plane averages 7 miles per gallon

How many round trips is Michael currently flying, and how many round trips are needed to break even?

How many round trips are needed so that Michael can draw a salary of $118,000 and still not show a loss?

What is the average before-tax profit of a round trip flight in 2016?

What is the incremental profit associated with adding a round-trip flight?

Answer 1

ANSWER

a. How many round trips is Michael currently flying, and how many round trips are needed to break even?

6 per week × 52 weeks) ----------------------------                            312

Revenue per trip ($330 x 6 passengers)   -----------------                $1,980

Total revenue ($1,980 per trip x 312 trips)------------------               $617,760

Variable costs:

Fuel          -------------------------------------------------                          $152,557

Maintenance     -------------------------------------------                        137,500

Total variable costs ----------------------------------------   $290,057

Variable costs per trip ($290,057 ÷ 312) -------------------------- $929.66

Contribution margin per trip ($1,980 − $929.66) ------------------- $1050.34

Fixed costs:

Salary    ------------------------ $ 65,000

Depreciation of plane     ---------------- 24,100

Depreciation of office equipment ---------- 2,700

Rent                               --------------------------- 41,000

Insurance                              ----------------------- 20,800

Miscellaneous                      ---------------------- 6,700

Total fixed costs                     ------------------------------ $160,300

Break-even number of trips is ($160,300 ÷ $1050.34) = 153 trips.

b. How many round trips are needed so that Micheal can draw a salary of $118,000 and still not show loss?

the break-even number of trips is ($213,300 ÷ $1050.34)=203

c. What is the average before tax profit of a round trip flight in 2016 ?

average before tax profit per round trip = $167,403 ÷ 312 = $ 537

d. What is the incremental profit associated with adding a round trip flight?

$1050.34.

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