Question

Vernon Airlines is a small airline that occasionally carries overload shipments for the overnight delivery company Never-Fail, Inc. Never-Fail is a multimillion-dollar company started by Wes Never immediately after he failed to finish his first accounting course. The company’s motto is “We Never-Fail to Deliver Your Package on Time.” When Never-Fail has more freight than it can deliver, it pays Vernon to carry the excess. Vernon contracts with independent pilots to fly its planes on a per-trip basis. Vernon recently purchased an airplane that cost the company $6,425,000. The plane has an estimated useful life of 25,700,000 miles and a zero salvage value. During the first week in January, Vernon flew two trips. The first trip was a round-trip flight from Chicago to San Francisco, for which Vernon paid $450 for the pilot and $400 for fuel. The second flight was a round trip from Chicago to New York. For this trip, it paid $400 for the pilot and $200 for fuel. The round trip between Chicago and San Francisco is approximately 4,900 miles and the round trip between Chicago and New York is 1,200 miles.

Required

1. Select if the costs mentioned below are direct or indirect.

2. Determine the total cost of each trip.

Select if the costs mentioned below are direct or indirect.

	Pilot Fuel Depreciation

	Chicago to San Francisco Chicago to New York Total cost

Answer 1

Pilot	Direct cost
Fuel	Direct cost
Depreciation	Indirect cost

Depreciation per mile = Cost of airplane/estimated useful life in miles

= 6,425,000/25,700,000

= $0.25

	Chicago to San Francisco	Chicago to New York
Pilot	450	400
Fuel	400	200
Depreciation	4,900 x 0.25 = 1,225	1,200 x 0.25 = 300
Total cost	$2,075	$900