Question

Comfi Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Comfi’s base airport to the major city in the state, Metropolis. Each month, 40 round-trip flights are made. Shown below is a recent month’s activity in the form of a cost-volume-profit income statement.

Fare revenues (400 passenger flights)				$48,000
Variable costs
Fuel		$14,000
Snacks and drinks		800
Landing fees		2,000
Supplies and forms		1,200		18,000
Contribution margin				30,000
Fixed costs
Depreciation		3,000
Salaries		15,000
Advertising		500
Airport hanger fees		1,750		20,250
Net income				$9,750

1. Without calculations, determine the contribution margin at the break-even point.

$_______________

2. If fares were decreased by 10% an additional 100 fares could be generated. However, total variable costs would increaase by 20%

a. how much would net income be impacted by this change? Net income decreases/increases to $

b. should the fair be adopted? Yes/No

Answer 1

Requirement 1:

At breakeven point, Contribution Margin is available to meet the fixed expenses only. This implies, Contribution Margin equals the fixed Costs.

Therefore, at breakeven point, Contribution Margin = Fixed Costs = $20250

Requirement 2a:

Calculation of net income:

	Existing	Proposed
Number of Passengers	400	500
Fare revenue per passenger	120	108
Fare Revenues	48000	54000
Variable Costs
Fuel	14000	16800
Snacks and Drinks	800	960
Landing Fees	2000	2400
Supplies and Forms	1200	1440
	18000	21600
Contribution Margin (Fare Revenues - Variable Costs)	30000	32400
Fixed Costs	20250	20250
Net Income	9750	12150

Net Income increases to $12150

Requirement 2b:

Since the net income increases due to the change in fare, the fare should be adopted.

Correct Answer is Yes.