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General Accounting Discussions: Break-even

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    Number of seats per plane: 120
    Average load factor (percentage of seats filled): 75%
    Average full passenger economy fare: $70
    Average variable cost per passenger: $30
    Fixed operating expenses per month: $1,200,000


    Aussie Airlines is considering offering a discounted fare of $50, which the company believes will increase the load factor to 80 per cent. Only the additional seats (hint: the difference between the original 75 per cent load factor and the projected 80 per cent load factor) will be sold at the discounted fare. Additional monthly advertising costs would be $80,000. How much pre-tax income would the discounted fare generate if Aussie Airlines has 40 flights per day, 30 days per month?
  2.  
    Pre-tax income from discounted fare:
    Fare per seat $50
    Variable costs $30
    Contribution $20

    Total contribution
    (120 x5%) = 6 seats x 40 flights x 30 days per month = $144,000
    Additional fixed costs of advertising ...................... 80,000
    Pre tax income ----------------------------------------------$64,000

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