Air Frisco has leased a single jet aircraft that it operates between San Francisco and the Fijian Islands. Only tourist-class seats are available on its planes. An analyst has collected the following information:
Seating capacity per plane ............................. 360 passengers
Average number of passengers per flight ............ 200 passengers
Average one way fare ................................... $500
Variable fuel costs ....................................... $14,000 per flight
Food and beverage services costs ..................... $20 per passenger
(no charge to passenger)
Commission to travel agents paid by Air Frisco .... 8% of fare
(all tickets are lease costs allocated to each flight) ... $53,000 per flight
Fixed annual lease costs allocated to each flight ...... $53,000 per flight
Fixed ground - services (maintenance, check in, baggage handling) costs allocated to each flight ................................................. $7,000 per flight
Fixed flight crew salaries allocated to each flight .... $4,000 per flight
Required
Assume that fuel costs are unaffected by the actual number of passengers on a flight.
1. Calculate the total contribution margin from passengers that Air Frisco earns on each one-way flight between San Francisco and Fiji.
2. The Market Research Department of Air Frisco indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 212. On the basis of financial considerations alone, should Air Frisco lower its fare? Show your calculations.
3. Travel International, a tour operator, approaches Air Frisco with the possibility of chartering its aircraft. The terms of charter are as follows: (a) For each one-way flight, Travel International will pay Air Frisco $74,500 to charter the plane and to use its flight crew and ground-service staff; (b) Travel International will pay for fuel costs; and (c) Travel International will pay for all food costs. On the basis of financial considerations alone, should Air Frisco accept Travel International's offer? Show your calculations. What other factors should Air Frisco consider in deciding whether to charter its plane to Travel International?