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	$4,926
Flight crew salaries	3,773
Airplane depreciation	1,781
Variable cost per passenger—business class	55
Variable cost per passenger—economy class	45
Round-trip ticket price—business class	515
Round-trip ticket price—economy class	285

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. Computation of the break-even number of seats sold on a single round-trip flight for the overall product, E

Total Break-even number of seats sold = Total Fixed Cost of overall product / Total contribution per unit

= ($ 4926 + $ 3773 + $ 1781) / ($ 515 - $ 55) + ($ 285 - $ 45)

= $ 10480 / $ 700

= 15 seats

b. Break-even point of no. of seats sold to business class and economy class

Business class seats at break-even = (15 seats x 10%)

= 1.5 or 2 seats

Economy class seats at break-even = (15 seats x 90%)

= 13.5 or 13 seats