1. A&MIS 5251 Session 26 A&MIS 525 May 6, 2002 William F. Bentz

2. A&MIS 5252 Agenda Today – Session 26  Tracey’s Tunes  HFD 11-29

3. A&MIS 5253 For decision purposes  Management, available resources, and company practices will influence the scope of the analysis.  Based on the above, some items will be “givens” and not open to repeat study.  Other factors will determine final decisions when the financials are close.

4. A&MIS 5254 Meanings of Product Cost R&DDesign Produc- tion Consumer Service Distri- bution Market- ing Inventoriable product costs Reimbursable government contract costs Decision-relevant costs

5. A&MIS 5255 E11-29  For decision purposes, the focus will be on the net revenue from customers, not the overall contribution margin. We could focus on the overall contribution margin, but the fuel costs will be the same as between alternatives, even though the cost of fuel varies with the number of flights.

6. A&MIS 5256 E11-29: Net revenue – Part 1 Average one-way fare$ 500 Commission of 8% 40 Net fare collected by Frisco$ 460 Average paid fares per flight × 200 Revenues per flight$92,000 Cost of food & beverages 4,000 Contribution from passengers$88,000

7. A&MIS 5257 E11-29: Operating Income Contribution from passengers$88,000 Less fuel costs 14,000 Contribution per flight$74,000 Fixed costs: Leases$53,000 Ground services7,000 Flight crew 4,000 64,000 Operating income$10,000

8. A&MIS 5258 E11-29: Fare Decrease – Part 2 Average one-way fare$480.00 Commission of 8% 38.40 Net fare collected $441.60 Average paid fares per flight × 212 Revenues per flight*$93,619 Cost of food & beverages 4,240 Contribution from passengers$89,379 *Rounded

9. A&MIS 5259 E11-29: Recommendation I would recommend the fare decrease after checking on the assumption that fuel costs are unaffected, or affected very little.

10. A&MIS 52510 E11-29: Fare Decrease – Part 3 Contribution from passengers$89,379 Deduct fuel costs 14,000 Contribution per flight$75,379 Revenue from charters 74,500 Net benefit of flight operation$ 879

11. A&MIS 52511 E11-29: Other issues  What are the resources of Travel International in terms of payment and the likelihood of continuing business?  What effect would the availability of flights have on Air Frisco’s regular customer base and on other Air Frisco flights?

12. A&MIS 52512 E11-29: Other issues  What is the probability that flights and passenger loads will improve as opposed to the probability of declines?  What factors are likely to affect the charter business.

13. A&MIS 52513 E11-29: Reflections  Focusing on either total contribution margin or contribution from passengers is fine for requirements two and three so long as all the cost elements are considered correctly. The standard contribution margin format would work fine here.

14. A&MIS 52514 E11-29: Operating Income Revenues$100,000 Less:Commissions $8,000 Food & beverages4,000 Fuel14,000 26,000 Contribution margin$ 74,000 Leases$53,000 Ground services7,000 Flight crew 4,000 64,000 Operating income$10,000

15. A&MIS 52515 E11-29: Fare Reduction Revenues$101,760 Less:Commissions $ 8,141 Food & bev.4,240 Fuel 14,000 26,381 Contribution margin$ 75,379 Leases$53,000 Ground services7,000 Flight crew 4,000 64,000 Operating income$10,379