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Accounting
Operating income it typically defined to include all operating expenses other than depreciation and taxes (Investopedia, 2011). Because the airplanes are leased, there is no depreciation for West Coast Airlines to take into consideration anyway. The operating income is as follows:
Revenue
AVG Passengers
Variable fuel
Revenue/pass
Food & Beverage
F&B/pass
Fixed Lease
Ground Services
Flight Crew
Operating Income
The company right now is losing $31,012.50 on every one-way flight to Fiji.
If the company lowers the cost of the flight in order to generate an increase in volume, the operating income figures will look as follows:
Revenue
Avg Passengers
Variable fuel
14000
Revenue/pass
Food & Beverage
F&B/pass
Commission
Fixed Lease
53000
Ground Services
Flight Crew
Operating Income
-28924
By these figures, Fiji Air loses $28,924 per one-way flight with the lower ticket price and the higher average number...
The bigger issue is that even under this scenario, the company loses an incredible amount of money per flight. It would appear that the bigger problem is the lease per flight. The lease is a fixed cost, but right now the company is treating it like a variable cost. What the company needs to do is realize that it either needs to add more flights to bring the average cost of the lease per flight down to a level where these flights can be profitable, or it needs to use a smaller aircraft. Given that the load factor on these flights under the first scenario is a paltry 53.8%, the latter option should be utilized, providing that the airline can find an aircraft capable of making this flight that comes with a smaller capacity and more importantly a smaller price tag.
3) With the Travel International offer, there are a few changes to the income statement. The first is that the food & beverage and fuel costs will be removed, since TI is paying those. The lease amount per flight will remain the same, since in total Westcoast Air is running the same number of flights. Additionally, the commission paid to the travel agents must be removed, since the agents are not involved in selling these tickets. The other assumption is that the number of passengers…
References:
Investopedia. (2011). Operating income. Investopedia. Retrieved February 8, 2012 from http://www.investopedia.com/terms/o/operatingincome.asp#axzz1lna6LUYy
No author. (2012). Break-even point. Accounting Coach.com. Retrieved February 8, 2012 from http://www.accountingcoach.com/online-accounting-course/01Xpg01.html
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