cost problem

Project Description:

consider the decision by national airlines, inc. regarding the number of flights to operate per day on the air shuttle route between new york and boston. its advertising, personnel, and other expenditures to support the operation in new york and boston amount to $24,000 per day. flying crew, fuel, and other flight-related expenditures amount to $3,000 per round-trip flight. landing and airport gate fees are $1,800 per round-trip flight. in addition, ground support personnel cost $2,000 per round-trip flight as company policy seeks to maintain quality service even as volume increases. national pays a commission of 5% to travel agents on a round-trip fare of $200 per passenger. a full flight carries 100 passengers.

1. how many flights in a day must national airlines operate to make 25% profit margin if it expects the average load factor (number of passengers to the seating capacity) to be 70% per flight?

2. suppose the load factor for national airlines is not expected to equal 70% for each flight. instead, the load factor is expected to be 90% for the first round-trip flight of the day and is expected to decline by 10% for each additional round-trip flight introduced in the same day. how many round-trip flights per day should national airlines operate to maximize profit?

hint: this problem is analogous to a bank/retailer deciding on the number of branches/stores in a geographical area. you need to think about how total revenue, total costs and profits change with the addition of flights. you can either use excel to create a scenario analysis or use the incremental cost versus incremental revenue approach or formulate this as a profit maximization problem and solve for the optimum.
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