Product Costing and Decision Analysis for a Service Company
Blue Star Airline provides passenger airline service, usingsmall jets. The airline connects four major cities: Charlotte,Pittsburgh, Detroit, and San Francisco. The company expects to fly170,000 miles during a month. The following costs are budgeted fora month:
| Fuel | $2,120,000 |
| Ground personnel | 788,500 |
| Crew salaries | 850,000 |
| Depreciation | 430,000 |
| Total costs | $4,188,500 |
Blue Star management wishes to assign these costs to individualflights in order to gauge the profitability of its serviceofferings. The following activity bases were identified with thebudgeted costs:
| Airline Cost | Activity Base |
| Fuel, crew, and depreciation costs | Number of miles flown |
| Ground personnel | Number of arrivals and departures at an airport |
The size of the company's ground operation in each city isdetermined by the size of the workforce. The following monthly dataare available from corporate records for each terminaloperation:
| TerminalCity | | GroundPersonnel Cost | | Number ofArrivals/Departures |
| Charlotte | | | $256,000 | | | | 320 | |
| Pittsburgh | | | 97,500 | | | | 130 | |
| Detroit | | | 129,000 | | | | 150 | |
| San Francisco | | | 306,000 | | | | 340 | |
| Total | | | $788,500 | | | | 940 | |
Three recent representative flights have been selected for theprofitability study. Their characteristics are asfollows:
| Description | MilesFlown | Number ofPassengers | Ticket Priceper Passenger |
| Flight 101 | Charlotte to San Francisco | 2,000 | | 80 | | $695.00 | |
| Flight 102 | Detroit to Charlotte | 800 | | 50 | | 441.50 | |
| Flight 103 | Charlotte to Pittsburgh | 400 | | 20 | | 382.00 | |
Required:
1. Determine the fuel, crew, and depreciationcost per mile flown.
$ per mile
2. Determine the cost per arrival or departureby terminal city.
| Charlotte | $ |
| Pittsburgh | $ |
| Detroit | $ |
| San Francisco | $ |
3. Use the information in (1) and (2) toconstruct a profitability report for the three flights. Each flighthas a single arrival and departure to its origin and destinationcity pairs. Enter all amounts as positive numbers, except for anegative income from operations.
| Blue Star Airline |
| Flight Profitability Report |
| For Three Representative Flights |
| Flight 101 | Flight 102 | Flight 103 |
| Passenger revenue | $ | $ | $ |
| Fuel, crew, and depreciation costs | $ | $ | $ |
| Ground personnel | | | |
| $ | $ | $ |
| Flight income from operations | $ | $ | $ |
