JetTaxi is a passenger airplane line that contracts with larger, well-known lines to provide transportation across the United States. JetTaxi owns 25 aircraft, and currently has contracts for 17 of those aircraft. The other lines pay JetTaxi $2,500,000 per year to provide carrier services for their passengers. JetTaxi is considering a new contract where they would provide 5 airplanes to a new company for $1,800,000 per year, per plane. Each JetTaxi plane incurs yearly costs of $600,000 for labor, $200,000 for fuel, $400,000 in fixed overhead, and $800,000 in variable overhead. What would be the differential gain or loss on this contract? Show your solutions and answer.
| Revenue for new contract for 5 aircraft = $18,00,000* 5 = $90,00,000 |
| Fixed overhead cost is not relevant for decision as if new contract is not accepted then also this cost still exist. |
| Relevant cost per aircraft for a year = Labor cost + Fuel + Variable overhead = $600,000 +$200,000 + $800,000 = $16,00,000 |
| Total relevant cost for 5 aircraft = $16,00,000*5 = $80,00,000 |
| Differential gain or loss on this contract = Revenue - Relevant cost = $90,00,000 - $80,00,000 = $10,00,00 |
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