Friendly Airways, Inc., a small two-plane passenger airline, has asked for your assistance in some basic analysis of its operations. Both planes seat 10 passengers each, and they fly commuters from Friendly's base airport to the major city in the province, Metropolis. Each month 40 round-trip flights are made. Shown below is a recent month's activity in the form of a cost-volume-profit income statement.

Instructions
(a) Calculate the break-even point in (1) dollars and (2) number of fares.
(b) Without calculations, determine the contribution margin at the break-even point.
(c) If fares were decreased by 10%, an additional 80 fares could be generated. However, total variable costs would increase by 20%. Should the fare decrease be adopted?

Transcribed Image Text:

Fare revenues (400 fares) Variable costs $50,000 Fuel Snacks and drinks Landing fees Supplies and forms $17,900 1,400 2,000 1,200 22,500 27,500 Contribution margin Fixed costs Depreciation Salaries Advertising Airport hangar fees 3,000 15,000 2,250 1,750 22,000 $5,500 Operating income