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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Break-even sales and sales mix for a service company

Zero Turbulence Airline provides air transportation services between Los Angeles, California; and Kona, Hawaii. A single Los Angeles to Kona round-trip flight has the following operating statistics:

Fuel $7,000
Flight crew salaries 3,200
Airplane depreciation 3,480
Variable cost per passenger—business class 140
Variable cost per passenger—economy class 120
Round trip ticket price—business class 800
Round trip ticket price—economy class 300

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.

  1. 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 10% business class and 90% economy class tickets.
  2. b.  How many business class and economy class seats would be sold at the break-even point?

a.

To determine

Sales mix: It refers to the relative distribution of the total sales among the number of products sold by a company. In other words, it is expressed as a percentage of units sold for each product with respect to the total units sold for all the products.

Break-even Point: It refers to a point in the level of operations at which a company experiences its revenues generated is equal to its costs incurred. Thus, when a company reaches at its break-even point, it reports neither an income nor a loss from operations. The formula to calculate the break-even point in sales units is as follows:

Break-evenpointinSales(units) =FixedCostsContributionMarginperunit

To determine: the break-even point in sales units for the overall Product E.

Explanation

Determine the break-even point in sales units for the overall Product E.

Fixed cost =$13,680

Contribution margin per unit =$228 per seat (4)

Break-evenpointinSales(units)forProductE] =FixedCostsContributionMarginperunit=$13,680$228=60seats

Working notes:

Determine the fixed cost.

Fixedcost =(Fuel+Crewsalaries+Airlinedepreciation)=$7,000+$3,200+$3,480=$13,680 (1)

Note: For break-even analysis, the Product-Business class tickets and Product-economy class tickets are considered as the components of one overall company’s Product E.

Determine the selling price per unit of Product E.

SellingpriceperunitofProductE]=(SellingpriceperunitofBusniessclass×salesmixofBusniessclass)+(SellingpriceperunitofEconomyclass×salesmixofEconomyclass)=($800perseat×10%)+($300perseat×90%)=$80perseat+$270perseat=$350perseat (2)

Determine the variable cost per unit of Product E

b.

To determine
the break-even sales (units) for Product-Business class and Product-Economy class.

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