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ACC 333 (Farrell) Classes 19& 20 Fall 2011 Page 1 of 8 In-Class Activity #1 – Charters at AirOxford AirOxford owns one jet and operates flights between Oxford and the Fiji Islands. Flights leave Oxford on Mondays and Thursdays and return to Oxford from Fiji on Wednesdays and Saturdays; there is only one flight on each of these days. AirOxford cannot offer any more flights between Oxford and Fiji. Only economy-class seats are available on its plane. You have the following information: Plane’s seating capacity 360 passengers Average number of passengers per flight 200 passengers Flights per week 4 flights Flights per year (flights per week x 52 weeks) 208 flights Average one-way fare per passenger $500 per passenger Fuel costs $70 per passenger Food and beverage service costs (all paid by AirOxford, no charge to passengers) $20 per passenger Commission paid to travel agents by AirOxford (all tickets are booked by travel agents) 8% of fare Fixed annual lease costs, allocated to each flight $53,000 per flight Fixed ground service costs (maintenance, check in, baggage handling), allocated to each flight $7,000 per flight Fixed flight crew salaries, allocated to each flight $4,000 per flight Required: 1. Calculate the contribution margin that AirOxford earns for each one-way flight (i.e., the per-flight CM, not the per-passenger CM) between Oxford and Fiji. 2. The Market Research Department of AirOxford indicates that lowering the average one-way fare to $480 will increase the average number of passengers per flight to 220. Should AirOxford lower its fare? Again, use the contribution margin per flight. 3. Travel International, a tour operator, approaches AirOxford on the possibility of chartering (renting out) AirOxford’s jet twice each month, first to take Travel International’s tourists from Oxford to Fiji and then to bring them back. If AirOxford accepts Travel International’s offer, AirOxford will be able to offer only 184 (208 – 24) of its own flights each year. The terms of the charter are as follows: a. For each one-way flight, Travel International will pay AirOxford $75,000 to charter the plane and to use its flight crew and ground service staff; b. Travel International will pay for fuel costs; c. Travel International will pay for all food costs. On purely financial considerations, should AirOxford accept Travel International’s offer? Use contribution margins, and show your calculations. 4. What other factors should AirOxford consider in deciding whether to keep operations as is (option 1), change the fare (option 2), or charter its plane to Travel International (option 3)?
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ACC 333 (Farrell) Classes 19& 20 Fall 2011 Page 2 of 8 In-Class Activity #2 – Special Order & Make or Buy Decisions at Redhawk Corporation The Redhawk Corporation is working at full production capacity, producing 10,000 units of a unique product called “Blitz”. Manufacturing costs per unit for Blitz are as follows: Direct materials $ 2 Direct manufacturing labor
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This note was uploaded on 03/19/2012 for the course ACCACC 333 taught by Professor Anne during the Fall '11 term at Miami University.

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