Fundamentals Of Cost Accounting (6th Edition)
6th Edition
ISBN: 9781259969478
Author: WILLIAM LANEN, Shannon Anderson, Michael Maher
Publisher: McGraw Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 3, Problem 20CADQ
To determine
Define the important assumptions and limitations in the given case.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Sun Airlines is a commercial airline that targets business and non-business 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. He has asked for your help in evaluating this plan.
ABC 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%. ABC's CEO, Richard Buchanan, 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. He has asked for your help in evaluating this plan.
Instruction:
As management accountants, write a brief memo to Richard Buchanan evaluating this strategy by discussing the advantages/disadvantages of increasing the ticket prices and its effect on the break even sales volume for ABC Airlines.
This question builds on your work from B-1. Competition is fierce for the Chicago to Atlanta route, and the airline realizes that it may need to reduce the current ticket price. They ask you to provide projections for number of reservations, number of denied passenger check ins (due to overbooking), penalties, sales, net income, and profit margin for this route at different ticket prices. The average number of reservations for this route is 184 when the ticket price is $420, use those figures as a base for your calculations. The airline conducted a price sensitivity analysis and determined that for every $20 increase in ticket price, demand will decrease by 1 ticket reservation. Similarly, ticket sales will increase by 1 reservation for every $20 decrease in ticket price. Using an appropriate data table, calculate the number of reservations, number of passengers denied check ins (due to overbooking), total penalties, total sales, net income, and profit margin (as a percentage) for…
Chapter 3 Solutions
Fundamentals Of Cost Accounting (6th Edition)
Ch. 3 - Write out the profit equation and describe each...Ch. 3 - What are the components of total costs in the...Ch. 3 - How does the total contribution margin differ from...Ch. 3 - Compare cost-volume-profit (CVP) analysis with...Ch. 3 - Fixed costs are often defined as fixed over the...Ch. 3 - Prob. 6RQCh. 3 - What is the margin of safety? Why is this...Ch. 3 - Prob. 8RQCh. 3 - Write out the equation for the target volume (in...Ch. 3 - How do income taxes affect the break-even...
Ch. 3 - Why is it common to assume a fixed sales mix...Ch. 3 - What are some important assumptions commonly made...Ch. 3 - Prob. 13CADQCh. 3 - Prob. 14CADQCh. 3 - The typical cost-volume-profit graph assumes that...Ch. 3 - The assumptions of CVP analysis are so simplistic...Ch. 3 - Prob. 17CADQCh. 3 - Consider a class in a business school where volume...Ch. 3 - Prob. 19CADQCh. 3 - Prob. 20CADQCh. 3 - Consider the Business Application,...Ch. 3 - Consider the Business Application,...Ch. 3 - Prob. 23CADQCh. 3 - Profit Equation Components Identify each of the...Ch. 3 - Profit Equation Components Identify the letter of...Ch. 3 - Basic Decision Analysis Using CVP Anus Amusement...Ch. 3 - Basic CVP Analysis The manager of Dukeys Shoe...Ch. 3 - CVP AnalysisEthical Issues Mark Ting desperately...Ch. 3 - Basic Decision Analysis Using CVP Derby Phones is...Ch. 3 - Prob. 30ECh. 3 - Basic Decision Analysis Using CVP Warner Clothing...Ch. 3 - Basic Decision Analysis Using CVP Refer to the...Ch. 3 - Prob. 33ECh. 3 - Prob. 34ECh. 3 - Analysis of Cost Structure Spring Companys cost...Ch. 3 - CVP and Margin of Safety Bristol Car Service...Ch. 3 - CVP and Margin of Safety Caseys Cases sells cell...Ch. 3 - Prob. 38ECh. 3 - Prob. 39ECh. 3 - Refer to the data for Derby Phones in Exercise...Ch. 3 - Refer to the data for Warner Clothing in Exercise...Ch. 3 - CVP with Income Taxes Hunter Sons sells a single...Ch. 3 - CVP with Income Taxes Hammerhead Charters runs...Ch. 3 - Prob. 44ECh. 3 - Prob. 45ECh. 3 - Prob. 46ECh. 3 - Prob. 47ECh. 3 - CVP Analysis and Price Changes Argentina Partners...Ch. 3 - Prob. 49PCh. 3 - CVP AnalysisMissing Data Breed Products has...Ch. 3 - Prob. 51PCh. 3 - Prob. 52PCh. 3 - CVP AnalysisSensitivity Analysis (spreadsheet...Ch. 3 - Prob. 54PCh. 3 - Prob. 55PCh. 3 - Extensions of the CVP ModelSemifixed (Step) Costs...Ch. 3 - Prob. 57PCh. 3 - Extensions of the CVP ModelTaxes Odd Wallow Drinks...Ch. 3 - Prob. 59PCh. 3 - Prob. 60PCh. 3 - Extensions of the CVP ModelTaxes Toys 4 Us sells...Ch. 3 - Extensions of the CVP AnalysisTaxes Eagle Company...Ch. 3 - Extensions of the CVP ModelMultiple Products...Ch. 3 - Extensions of the CVP ModelMultiple Products...Ch. 3 - Prob. 65PCh. 3 - Prob. 66PCh. 3 - Prob. 67PCh. 3 - Prob. 68PCh. 3 - Extensions of the CVP ModelMultiple Products and...Ch. 3 - Extensions of the CVP ModelTaxes With Graduated...Ch. 3 - Prob. 71PCh. 3 - Financial Modeling Three entrepreneurs were...
Knowledge Booster
Similar questions
- Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (165 seats × 40% occupancy × $220 ticket price)$ 14,520100.0%Variable expenses ($20.00 per person)1,3209.1Contribution margin13,20090.9%Flight expenses: Salaries, flight crew$ 1,800 Flight promotion760 Depreciation of aircraft1,800 Fuel for aircraft5,400 Liability insurance5,100 Salaries, flight assistants1,200 Baggage loading and flight preparation1,750 Overnight costs for flight crew and assistants at destination700 Total flight expenses18,510 Net operating loss$ (5,310) The following additional information is available about flight 482: Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips…arrow_forwardProfits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (170 seats × 40% occupancy × $210 ticket price) $ 14,280 100.0% Variable expenses ($19.00 per person) 1,292 9 Contribution margin 12,988 91% Flight expenses: Salaries, flight crew $ 1,600 Flight promotion 790 Depreciation of aircraft 1,750 Fuel for aircraft 5,100 Liability insurance 4,800 Salaries, flight assistants 1,300 Baggage loading and flight preparation 1,900 Overnight costs for flight crew and assistants at destination 600 Total flight expenses 17,840 Net operating loss $ (4,852) The following additional information is available about flight 482: Members of the flight crew are paid fixed annual salaries,…arrow_forwardThe WSJ recently presented data suggesting that United Airlines was not covering its costs onflights from San Francisco to Washington D.C. The article quoted analysts saying that Unitedshould discon- tinue this service. The costs per flight (presented in the article) included the costsof fuel, pilots, flight attendants, food, etc. used on the flight. They also included a share of thecosts associated with running the hubs at the two airports, such as ticket agents, buildingcharges, baggage handlers, gate charges, etc. Suppose that the revenue collected on the typi- calUnited flight from San Francisco to Washington does not cover these costs. Does this fact implythat United should discontinue these flights? Explainarrow_forward
- Dropping or Retaining a Flight Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: The following additional information is available about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a “high-risk” area. The remaining two-thirds would be unaffected by a decision to drop flight 482. c. The baggage loading and flight preparation expense is an allocation of ground crews’ salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on…arrow_forwardProfits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (175 seats × 40% occupancy × $240 ticket price) $ 16,800 100.0 % Variable expenses ($18.00 per person) 1,260 7.5 Contribution margin 15,540 92.5 % Flight expenses: Salaries, flight crew $ 2,000 Flight promotion 790 Depreciation of aircraft 1,700 Fuel for aircraft 5,500 Liability insurance 5,100 Salaries, flight assistants 1,300 Baggage loading and flight preparation 1,950 Overnight costs for flight crew and assistants at destination 500 Total flight expenses 18,840 Net operating loss $ (3,300 ) The…arrow_forwardGlobal Air is considering a new flight between Atlanta and Los Angeles. The average fare per seat for the flight is $780. The costs associated with the flight are as follows: Fixed costs for the flight: Crew salaries................................................ $ 4,860 Operating costs........................................... 50,000 Aircraft depreciation.................................. 25,000 Total......................................................... $ 79,860 Variable costs per passenger: Passenger check-in..................................... $ 20 Operating costs........................................... 100 Total......................................................... $ 120 The airline estimates that the flight will sell 170 seats. a. Determine the break-even number of passengers per flight. b. Based on your answer in (a), should the airline add this flight to its…arrow_forward
- The manager of an automobile dealership is considering a new bonus plan designed to increase sales volume. Currently, the mean sales volume is 14 automobiles per month. The manager wants to conduct a research study to see whether the new bonus plan increases sales volume. To collect data on the plan, a sample of sales personnel will be allowed to sell under the new bonus plan for a one-month period. a. Develop the null and alternative hypotheses most appropriate for this situation. b. Comment on the conclusion when H0 cannot be rejected. c. Comment on the conclusion when H0 can be rejected.arrow_forwardThe manager of the Danvers-Hilton Resort Hotel stated that the mean guest bill for a weekend is 600 or less. A member of the hotels accounting staff noticed that the total charges for guest bills have been increasing in recent months. The accountant will use a sample of future weekend guest bills to test the managers claim. a. Which form of the hypotheses should be used to test the managers claim? Explain. H0:600H0:600H0:=600Ha:600Ha:600Ha:600 b. What conclusion is appropriate when H0 cannot be rejected? c. What conclusion is appropriate when H0 can be rejected?arrow_forwardThe Heinrich Tire Company recalled a tire in its subcompact line in December 2021. Costs associated with the recall were originally thought to approximate $39 million. Now, though, while management feels it is probable the company will incur substantial costs, all discussions indicate that $39 million is an excessive amount. Based on prior recalls in the industry, management has provided the following probability distribution for the potential loss: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Loss Amount Probability $29 million 20% $19 million 50% $9 million 30% An arrangement with a consortium of distributors requires that all recall costs be settled at the end of 2022. The risk-free rate of interest is 6%. Required:1. & 2. By the traditional approach to measuring loss contingencies, what amount would Heinrich record at the end of 2021 for the loss and contingent liability? For the…arrow_forward
- Refer back to the original data. If Nelson River Tours drops the Advanced tours, Baldwin estimates that sales of Beginner tours would increase by 50%. He believes that he could still eliminate the $100,000 administrative position. Equipment currently used for the Advanced tours would be used by the additional Beginner tours. Should Baldwin drop the Advanced tour? Explain.arrow_forwardThe airline industry was hit particularly hard after the 9/11 attacks on the World Trade Center in 2001. In 2002, Southwest Airlines, one of the healthier airline companies, decided to lengthen the useful lives of its aircraft from 22 to 27 years. Shortly thereafter, following Southwest’s lead, other airlines made the same move.(a) What advantage, if any, did the airlines gain by making this change in estimate?(b) Would it have changed earnings or cash flows, and if it did, would the change have been favorable or negative?(c) Some people argue that the useful lives and depreciation of airplanes are irrelevant.They claim that because of the extensive maintenance and testing that airline companies are required by law to perform; the planes theoretically can be in service for an indefinite future period. What is wrong with this argument?arrow_forwardProfits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one such flight (Flight 482) follows:Ticket revenue (175 seats × 40% occupancy × $400 ticket price) $ 28,000 100.0%Less: Variable expenses ($15 per person) 2,100 7.5 Contribution margin 25,900 92.5%Less: Flight expenses: Salaries, flight crew 3,600 Flight promotion 1,500 Depreciation of aircraft 3,100 Fuel for aircraft 13,600 Liability insurance 8,400 Salaries, flight attendants 1,000 Baggage loading and flight preparation 3,400 Overnight costs for flight crew and attendants at destination 600Total flight expenses 35,200Net operating loss $ (9,300)The following additional information is available about Flight 482:a. Members of the flight crew are paid fixed annual salaries, whereas the…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Essentials of Business Analytics (MindTap Course ...StatisticsISBN:9781305627734Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. AndersonPublisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning