Chapter 26, Problem 26.6BPR

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
Depreciation	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.