Question

SITUATION 3 Tony Khoury, the Vice President Operations for the Flying Airlines, has been approached by a
Japanese Tourist agency about obtaining a special tourist charter flight from Japan to Hawaii.

The tourist agency has offered the Flying Airlines $160,000 for a round trip flight.

Considering the airline’s usual airfares and occupancy the round-trip flight would provide revenue of $250,000.
The cost and revenue data from the usual japan to Hawaii are as follows:

Revenue
Passenger revenue $250,000
Cargo revenue 30,000
Total revenue 280,000
Expenses
Variable expenses of flight $90,000
Fixed costs allocated 80,000
Total expenses 170,000
Profit $110,000

If the charter flight is accepted there will be no cargo revenue, but there will be a reduction of
$5,000 in the variable costs due to savings in reservations and ticketing costs.

(A) If there is spare capacity should the special tourist charter flight be accepted purely on financial considerations?

Are there any other factors that need to be considered?

(B) If there is no spare capacity and the tourist charter would have to take the place of an
existing flight should it be accepted on financial grounds in these circumstances?

Should any other factors be considered in these circumstances?

Answer 1

A. If there is spare capacity,
Yes. The Tourist Agency's offer can be accepted -purely on financial considerations
as every round trip will bring Flying Airlines ,an additional contribution of
Offer price 160000- Variable costs 85000= 75000
Other considerations include fixed costs remaining the same
(B) If there is no spare capacity and the tourist charter would have to take the place of an
existing flight ---it cannot be be accepted on financial grounds as explained below:
Loss in Passenger revenue(250000-160000)=	90000
Loss of cargo revenue	30000
Less: Savings in variable costs	-5000
Total loss per round trip	115000
Any further additions to fixed costs , as the airlines is already operating at full capacity.