Chapter 4, Problem 6PB

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:

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:

The size of the company’s ground operation in each city is determined by the size of the workforce. The following monthly data are available from corporate records for each terminal operation:

Three recent representative flights have been selected for the profitability study. Their characteristics are as follows:

Instructions

Determine the fuel, crew, and depreciation cost per mile flown.

Determine the cost per arrival or departure by terminal city.

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.