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	$5,941
Flight crew salaries	4,550
Airplane depreciation	2,149
Variable cost per passenger—business class	55
Variable cost per passenger—economy class	45
Round-trip ticket price—business class	595
Round-trip ticket price—economy class	305

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 = 5941+ 4550 + 2149 = 12640.

Variable cost per ticket is = 0.2 x Cost of business class + 0.8 x Cost of economy class = 0.2 x 55 + 0.8 x 45 = 11 +36= 47.

Selling cost per ticket is = 0.2 x Price of business class + 0.8 x Price of economy class = 0.2 x 595 + 0.8 x 305 = 119 + 244 = 363

Contribution margin per ticket = 363-47 = 316.

Break-even sales = Fixed cost/ Contribution margin per ticket = 12640/316 = 40

(A) Total number of seats at break-even = 40

(B) Business-class seats at break-even = 0.2 x 40 = 8

Economy-class seats at break-even = 0.8 x 40 = 32