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Unformatted text preview: isions on proﬁt. The decisions they
make are about volume, pricing, or incurring a cost. Therefore, managers require an un2 Approaching College Reading and
Use cost-volumederstanding of the relations among revenues, costs, volume, and proﬁt. The cost accountDeveloping a College-Levelprofit (CVP) analysis
ing department supplies the data and analysis, called cost-volume-proﬁt (CVP) analysis,
to analyze decisions.
that support these managers. 3 Approaching College Assignments:
Reading Textbooks and Following Directions Cost-Volume-Proﬁt Analysis and Airline Pricing
Cost-volume-proﬁt analysis helps managers evaluate the impact of alternative product pricing strategies on proﬁts. It can
also be useful for evaluating competitors’ pricing strategies
and efforts to grow market share, as in the following examples:
Aloha Airlines CEO David Banmiller and C. Thomas
Nulty, senior vice president for marketing and sales,
explain that their airline must charge $50 per seat to
break even when planes are 62 percent full.
Hawaiian Airlines, Aloha Airlines and go! are each
losing money when they sell interisland tickets below
$50, according to a study commissioned by Aloha
“Why would somebody come in and charge $19, and
$29, and $39 when their costs were substantially higher?
Why would somebody do it?” said Banmiller.
cor50782_ch01_001-072.indd 1 In Action The Sabre study showed that when planes are
62 percent full, Aloha’s costs are $50 per seat,
Hawaiian’s are $55, and go!’s are $67. ✓ R go! Resources
However, managers at the parent company ofelated(Mesa
See pages 000 their
Airlines) disputed the estimates with a CVP analysis of to 000
of the Annotated Instructor’s
Edition for general suggesJonathan Ornstein, Mesa’s chief executive ofﬁcer, to the chapters
tions related said
yesterday that Aloha’s cost estimates are wayOne. when
it comes to his airline. He said go!’s expenses per passenger are about $40 when the planes are 80 percent
Note: Aloha Airlines is no longer in business.
Source: Rick Daysog, “Below-Cost Fares Puzzle Aloha Airlines
CEO,” Honolulu Advertiser, December 21, 2006.
10/5/09 11:09:29 PM 81 lan27114_ch03_080-109.indd 81 10/22/09 10:33:50 PM REVISED PAGES Part II 82 Cost Analysis and Estimation Proﬁt Equation
Operating proﬁt equals total
revenue less total costs. PART 1 The key relation for CVP analysis is the proﬁt equation. Every organization’s ﬁnancial
operations can be stated as a simple relation among total revenues (TR), total costs (TC),
and operating proﬁt:
Operating proﬁt Total revenues Total costs TR
Orientation go by different names
(For not-for-proﬁt and government organizations, the “proﬁt” may
Proﬁt such as “surplus” or “contribution to fund,” but the analysis is the same.) Both total
revenues and total costs are likely to be affected by changes in the amount of output.1 We
rewrite the proﬁ...
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- Spring '07