Flyaway Airlines is facing a common airline decision: whether to maintain its own online reservation center or outsource reservation management to an ecommerce company like Expedia.com or Travelocity.com. Travelocity.com would charge Flyaway a small percentage of the ticket price per online reservation in exchange for hosting all the airline’s Internet information needs. Flyaway would assign the resulting reservation service fees to scheduled flights and then to passenger seats to determine the cost per passenger seat. If Flyaway maintains its own online reservation center, the total cost of the center would be divided by the number of scheduled flights and assigned to passenger seats on the flight to determine the cost per seat.

You have been called in as a consultant to give Flyaway managers some idea of the possible effects of the two cost-allocation alternatives and to advise them on their outsourcing decision. Describe the two types of activity-based allocation methods proposed. What are the implications of using such methods? What other factors should be considered?