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?
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?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
WSM Corporation, Need assistance with Req A, Req B1, Req B2
Transcribed Image Text: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 x 4 flights per day). WSM has hired
determine activity-based costs for this operation. The consultant's report shows the following.
consultant to
Activity Measure (cost Unit Cost(cost per unit of
Activity
Flying and maintaining aircraft
Serving passengers
Advertising and marketing
driver)
Number of flights
Number of passengers
Number of promotions
activity)
$ 1,300 per flight
5 per passenger
$48,000 per promotion
WSM estimates the following annual information. With 13 advertising promotions, it will be able to generate demand for 40 passengers
per flight at a fare of $190. The lease of the 60-seat aircraft will cost $3,600,000. Other equipment costs will be $1,800,000.
Administrative and other marketing costs will be $1,000,000.
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
for flights would decrease by $100 as a result of Internet sales. Administrative and other marketing costs would increase by $1
rate
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?
- Assume
manao
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 $
discount ticket, good for reservations made in advance, would sell for $145. Management estimates that it can sell 35,000
C.
now concider
215.
A
tickets (25 per flight) at the unrestricted airfare of $215. 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 $1,600,000? 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.
Complete this question by entering your answers in the tabs below.
Reg A
Reg B1
Req B2
Reg C
What annual operating income can WSM expect from this new service? (Enter your answer in thousands of dollars.)
Operating income
< Reg A
Req B1 >
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