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	$7,558
Flight crew salaries	5,789
Airplane depreciation	2,733
Variable cost per passenger—business class	60
Variable cost per passenger—economy class	50
Round-trip ticket price—business class	580
Round-trip ticket price—economy class	290

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 10% business class and 90% 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

a. Break even = total fixed costs/(revenue per unit – variable costs per unit)

Total fixed costs = fuel+flight crew salary+depreciation = 7558+5789+2733 = $16,080

Ticket price for E = 10% of business class ticket price + 90% of economy class ticket price

= 10% of 580 + 90% of 290

= $319

Similarly variable costs per seat for E = 10% of 60 + 90% of 50

= $51

Thus number of seats at break even = 16,080/(319-51)

= 60 seats.

b. Out of the 60 seats 10% are business and 90% is economy.

Thus business class seats at breakeven = 10% of 60 = 6 seats

Economy class seats at break even = 90% of 60 = 54 seats

Thus the answer are:

a.

Total no. of seats at break even

60

seats

b.

Business class seats at break even	6	seats
Economy class seats at break even	54	seats