To: Eli Colby
Date: November 6, 2010
Re: Belle Aire Charter Income
Thank you for choosing our offices to handle all of your financial needs. I understand you are having a problem figuring out why your company is currently not making any profit and are considering removing one of your charter planes. I hope to address all of your concerns and help find a solution to make your business profitable and help you stay competitive in the market you are in. After reviewing your income statement and seeing how you allocate costs, I created a segmented income statement (Ex-1). This statement allows us to see exactly how the costs are broken down according to your current system. According to your specifications, it…show more content… So, I did remove those costs from each line and put them as a common cost which is subtracted from the total product segment margin. If you see Ex-2, you will notice now that your entire fleet is profitable and the common costs are what make your net income negative.
If you decided to keep all three of your planes, which I strongly suggest, I would propose a couple of things. First, I would say instead of making your maintenance workers salaried, I would keep time cards for each worker and pay them an hourly rate so that you may have less fixed expenses. I would also consider getting a contract with the Government to use only your two planes for a locked in rate or that they use your planes for a minimum amount per month. Since they make up 25% of your business, this will give you an opportunity to keep the revenue consistent and keep them out of another charter. I would continue to follow the income statement I completed to allocate your costs because in general, businesses to not consider costs related to selling or the office building in their profitability of their product lines. I understand the nature of your business is very customized however I would also try and work out agreements with other airports you regularly land in to lock in rates if you use them frequently enough. Another suggestion I would say is to use your advertising wisely. You know that your PC37 is