Question

Sun Airlines is a commercial airline that targets business and non-business travelers. In recent months, the airline has been unprofitable. The company has break-even sales volume of 75% of capacity, which is significantly higher than the industry average of 65%. Sun's CEO, Sam Armstrong, is concerned about the recent string of losses and is considering a strategic plan that could reduce the break-even sales volume by increasing ticket prices. He has asked for your help in evaluating this plan. Using the information you learned in the chapter, briefly discuss the pros and cons of Mr. Armstrong's plan.

Answer 1

Inorder to reduce the break-even sales:

If the selling price is increased, the contribution per ticket would increase. This may lead the break even sales to come down.

But, in this case, if the prices are increased, the sales volume might be decreased which might in long run reduces the market share of the company.

This would be a loss to the company.

Inorder to decrease the break even sales, we need to reduce the variable cost or fixed cost.

Costs can be reduced using value engineering methods.

It is best to adopt target costing system.

In that way, we would adopt the market selling prices and we would get our target cost, efforts are needed to get our cost within or equal to the target cost. This would make the company has break-even volume in line with the industry average.