Integrative Case $10-81($Algo$)$ Cost Hierarchies, Cost of Customers, and Pricing $($LO $10-1,2,3,4)$

WSM Corporation is considering offering an air shuttle service between Sao Paulo and Rio de Janeiro. It plans to offer four flights every day $($excluding certain holidays$)$ for a total of $1,400$ flights per year $(=350$ days $4$ flights per day$).$ WSM has hired a consultant to determine activity$-$based costs for this operation. The consultant's report shows the following:

$\backslash$table$[[$Activity$,$Activity Measure $($cost driver$),$Unit Cost $($cost per unit of activity$)],[$Flying and maintaining aircraft,Number of flights,$$1,900$ per flight$],[$Serving passengers,Number of passengers,$5$ per passenger$],[$Advertising and marketing,Number of promotions,$$54,000$ per promotion$]]$

WSM estimates the following annual information. With $20$ advertising promotions, it will be able to generate demand for $40$ passengers per flight at a fare of $$240.$ The lease of the $60-$seat aircraft will cost $$4,800,000.$ Other equipment costs will be $$2,400,000.$ Administrative and other marketing costs will be $$1,300,000.$

Required:

a$.$ What annual operating income can WSM expect from this new service?

b$-1.$ WSM is considering selling tickets over the Internet to save on commissions and other costs. It is estimated that the cost driver rate for flights would decrease by $$100$ as a result of Internet sales. Administrative and other marketing costs would increase by $$1$ million. WSM estimates that the added convenience would generate a $5$ percent increase in demand. All other costs and fares would remain the same. What annual operating income can WSM expect from adopting Internet ticket sales?

b$-2.$ Would you recommend that WSM adopt Internet ticket sales?

c$.$ Assume that WSM management decides not to adopt the Internet strategy, regardless of your answer to requirement $($b$).$ Instead, it is now considering a plan to sell tickets at two prices. An unrestricted ticket $($good for travel at any time on any day$)$ would sell for $ $265.$ A discount ticket, good for reservations made in advance, would sell for $$125.$ Management estimates that it can sell $35,000$ tickets $(25$ per flight$)$ at the unrestricted airfare of $$265.$ All other data remain the same.

Ignoring the information in requirement $(b),$ how many discounted tickets would WSM have to sell annually to earn an operating income of $$1,000,000?$ Assume that the annual number of flights remains at $1,400$ and that the discounted tickets would be evenly divided across the $1,400$ flights.

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