Concept explainers
Product costing and decision analysis for a service company
Blue Star Airline provides passenger airline service, using small jets. The airline connects four major cities: Charlotte, Pittsburgh, Detroit, and San Francisco. The company expects to fly 170,000 miles during a month. The following costs are budgeted for a month:
Fuel | $2,120,000 |
Ground personnel | 788,500 |
Crew salaries | 850,000 |
430,000 | |
Total costs | $4,188,500 |
Blue Star management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs:
Airline Cost | Activity Base |
Fuel, crew, and depreciation costs | Number of miles flown |
Ground personnel | Number of arrivals and departures at an airport |
The size of the company’s ground operation in each city is determined by the size of the workforce. The following data are available from corporate records for each terminal operation:
Terminal City | Ground Personnel Cost | Number of Arrivals/Departures |
Charlotte | $256,000 | 320 |
Pittsburgh | 97,500 | 130 |
Detroit | 129,000 | 150 |
San Francisco | 306,000 | 340 |
Total | $788,500 | 940 |
Three recent representative flights have been selected for the profitability study. Their characteristics are as follows:
Description | Miles Flown | Number of Passengers | Ticket Price per Passenger | |
Flight 101 | Charlotte to San Francisco | 2,000 | 80 | $695,00 |
Flight 102 | Detroit to Charlotte | 800 | 50 | 441,50 |
Flight 103 | Charlotte to Pittsburgh | 400 | 20 | 382,00 |
Instructions
1. Determine the fuel, crew, and depreciation cost per mile flown.
2. Determine the cost per arrival or departure by terminal city.
3. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs.
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