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Integrative Case 10-72 (Algo) Cost Hierarchies, Cost of Customers, and Pricing (LO 10-1, 2, 3, 4) WSM Corporation is considering offering an air shuttle service between Sao Paulo and Rio de Janeiro. It plans to offer four flights every day (excluding certain holidays) for a total of 1.400 flights per year = 350 days * 4 flights per day). WSM has hired a consultant to determine activity-based costs for this operation The consultant's report shows the following. Activity Flying and maintainine aircraft Serving passengers Advertising and marketing Activity Measure (cost Unit Cost(cost per unit of driver) activity) Number of flights $ 2,300 per flight Number of passengers 5 5 per passenger Number of promotions $58,000 per promotion WSM estimates the following annual information. With 18 advertising promotions, it will be able to generate demand for 40 passengers per flight at a fare of $310. The lease of the 60-seat aircraft will cost $5.600.000 Other equipment costs will be $2,800,000 Administrative and other marketing costs will be $1,500,000 Required: a. What annual operating income con WSM expect from this new service? b-1. WSM is considering selling tickets over the Internet to save on commissions and other costs. It is estimated that the cost driver rate for flights would decrease by $50 as a result of Internet sales. Administrative and other marketing costs would increase by $1 million WSM estimates that the added convenience would generate a 5 percent increase in demand. All other costs and fares would remain the same. What annual operating income can WSM expect from adopting Internet ticket sales? b-2. Would you recommend that WSM adopt Internet ticket sales? c. Assume that WSM management decides not to adopt the Internet strategy, regardless of your answer to requirement (b). Instead, it is now considering a plan to sell tickets at two prices. An unrestricted ticket (good for travel at any time on any day) would sell for $ 335. A discount ticket, good for reservations made in advance, would sell for $145. Management estimates that it can sell 35,000 tickets (25 per flight) at the unrestricted airfare of $335. All other data remain the same. Ignoring the information in requirement (b), how many discounted tickets would WSM have to sell annually to earn an operating income of $3,000,000? Assume that the annual number of flights remains at 1,400 and that the discounted tickets would be evenly divided across the 1.400 flights. X Answer is complete but not Complete this question by entering your answers in the tabs be Req A Reg B1 Req B2 Reqc What annual operating income can WSM expect from this new service? ( Operating income $ 2,916 Re DY Req A Req B1 Req B2 Reqc WSM is considering selling tickets over the Internet to save on commiss driver rate for flights would decrease by $50 as a result of Internet sale increase by $1 million. WSM estimates that the added convenience wou costs and fares would remain the same. What annual operating income (Enter your answer in thousands of dollars.) Operating income $ (76,000)

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