Question

Break-Even Sales and Sales Mix for a Service Company Yellow Dove Airways provides air transportation services between Portland and Minneapolis. A single Portland to Minneapolis round-trip flight has the following operating statistics: Fuel and landing fees $9,926 Flight crew salaries 7,603 Airplane depreciation 3,591 Variable cost per passenger—business class 55 Variable cost per passenger—economy class 45 Round-trip ticket price—business class 535 Round-trip ticket price—economy class 285 It is assumed that the fuel and landing fees, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. a. Compute the break-even number of seats sold on a single round-trip flight for the overall product. Assume that the overall product is 10% business class and 90% economy class tickets. Round your answer to whole number. Total number of seats at break-even seats b. How many business class and economy class seats would be sold at the break-even point? Round your answers to whole number. Business class seats Economy class seats

Answer 1

Total fixed costs = Fuel and landing fees + Flight crew salaries + Airplane depreciation

= 9,926 + 7,603 + 3,591

= $21,120

Variable cost per passenger—business class = $55 Variable cost per passenger—economy class = $45 Round-trip ticket price—business class = $535 Round-trip ticket price—economy class = $285

Contribution margin per unit = Selling price per unit - Variable cost per unit

Contribution margin per passenger—business class = 535 - 55

= $480

Contribution margin per passenger—economy class = 285 - 45

= $240

Overall product is 10% business class and 90% economy class tickets

Hence, weighted contribution margin per ticket = 480 x 10% + 240 x 90%

= 48 + 216

= $264

a)

Break even level = Fixed costs/weighted contribution margin per ticket

= 21,120/264

= 80

b)

Business class seats at break even = 80 x 10%

= 8

Economy class seats at break even = 80 x 90%

= 72