Question

Break-Even Sales and Sales Mix for a Service Company

Zero Turbulence Airline provides air transportation services between Los Angeles, California; and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:

Fuel $10,594
Flight crew salaries 8,114
Airplane depreciation 3,832
Variable cost per passenger—business class 50
Variable cost per passenger—economy class 40
Round-trip ticket price—business class 580
Round-trip ticket price—economy class 310

It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight. If required round the answers to nearest whole number.

a. Compute the break-even number of seats sold on a single round-trip flight for the overall product, E. Assume that the overall product is 20% business class and 80% economy class seats.

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?

Business class seats at break-even seats
Economy class seats at break-even seats

Answer 1

FIXED COST = Fuel + Flight crew salaries +Airplane depreciation

= 10594+8114+3832

= 22540

Contribution = round trip ticket price – variable cost per passenger

Business class= 580-50=530

Economy class = 310-40=270

Product mix = 10% business class and 90% economy class tickets

Overall contribution= 530 *0.20 + 270 * 0.80 = 106+216 = 322

Unit selling price = 580*0.20+310*.80 = 364

Contribution margin = 322/364 = 88%

Total number of seats at break-even seats = 22540/322 = 70

b.

Business class and economy class seats would be sold at the break-even point

Business class seats at break-even seats = 70* 0.10 = 7

Economy class seats at break-even seats = 70* 0.9 = 63