Midsouth Airlines provides charter airplane services. In October this year, the company was operating at 60% of its capacity when it received a bid from the local community college. The college was organizing a Washington, D.C., trip for its international student group. The college only budgeted $30,000 for roundtrip airfare. Midsouth Airlines normally charges between $50,000 and $60,000 for such service given the number of travelers. Midsouth determined its cost for the roundtrip flight to Washington to be $44,000, which consists of the following:
Variable cost . . . . . . . $15,000
Fixed cost . . . . . . . . . 29,000
Total cost . . . . . . . . . . $44,000
Although the manager at Midsouth supports the college’s educational efforts, she could not justify accepting the $30,000 bid for the trip given the projected $14,000 loss. Still, she decides to consult with you, an independent financial consultant. Do you believe the airline should accept the bid from the college?
Prepare a memorandum, with supporting computations, explaining why or why not.