Fuel $10,400
Flight crew salaries 4,300
Airplane depreciation 10,500
Variable cost per passenger—business class 100
Variable cost per passenger—economy class 75
Round-trip ticket price—business class 1,000
Round-trip ticket price—economy class 200
It is assumed that the fuel, crew salaries, and airplane depreciation are fixed, regardless of the number of seats sold for the round-trip flight.
a. Compute the break-even number of seats sold on a single round-trip flight for the overall product, E. Assume that the overall product mix is 20% business class and 80% economy class tickets.
b. How many business class and economy class seats would be sold at the break-even point?
Answer:
a. Unit contribution margin of overall product (E):
Unit selling price of E [(20% × $1,000) + (80% × $200)]………………………… $360
Unit variable cost of E [(20% × $100) + (80% × $75)]…………………………… 80
Unit contribution margin of E……………………………………………………… $280
Fixed costs of the New York City to George Town, Grand Cayman round-trip flight:
Fuel……………………………………………… $10,400
Flight crew salaries…………………………… 4,300
Depreciation……………………………………… 10,500
Total fixed costs………………………………… $25,200
Break-even sales (units) of overall product:
Break-Even Sales (units) = Fixed Costs
Unit Contribution Margin
Break-Even Sales (units) = $25,200
$280 per seat
= 90 seats (tickets)
b. Business class break-even (90 seats × 20%)…………………………… … 18 seats
Economy class break-even (90 seats × 80%)…………………………… 72 seats
Total break-even……………………………………………………………… 90 seats