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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

Communication

Sun Airlines is a commercial airline that targets business and nonbusiness travelers. In recent months, the airline has been unprofitable. The company has break-even sales volume of 75% of capacity, which is significantly higher than the industry average of 65%. Sun's CEO, Neil Armstrong, is concerned about the recent string of losses and is considering a strategic plan that could reduce the break-even sales volume by increasing ticket prices, lie has asked for your help in evaluating this plan.

Write a brief memo to Neil Armstrong evaluating this strategy.

To determine

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 write: a brief memo to Mr. N in evaluating this strategy.

Explanation

Write a brief memo to Mr. N in evaluating this strategy.

MEMO

From: ABC

To: Mr. N

CEO, S Airlines

Dated: 26th February, 20XX

Re: Evaluation of strategy of reducing the break-even sales volume by increasing ticket prices.

Sir,

From the performance of S Airlines in recent months, it is found that it has tried really hard to keep its sales volume above its break-even that has led it to face continued losses for a couple of months. Its break-even sales volume is 75% which is significantly higher than the industry average of 65%.

To deal with the situation, the airline has made a strategy to increase the ticket prices that would decrease the break-even sales volume. This is because, the higher ticket prices would increase the contribution margin. However, it is expected that the higher ticket prices would reduce the sales volume. Thus, if there is a decrease in the sales volume exceeds the decrease in the break-even sales volume, the strategy would fail and lead the company to increase loss...

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