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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 Activity Measure Unit Cost(cost per

(cost driver) unit of activity)

Flying and Number of flights $600per flight

maintaining aircraft

Serving passengers Number of passengers $5per passenger

Advertising Number of promotions $41,000per promotion

and marketing

a.What annual operating income can WSM expect from this new service?(Enter your answer in thousands of dollars.)

operating income?

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 $100 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?(Enter your answer in thousands of dollars.)

operating income?

b-2.Would you recommend that WSM adopt Internet ticket sales?

yes/no?

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 $ 180. A discount ticket, good for reservations made in advance, would sell for $130. Management estimates that it can sell 35,000 tickets (25 per flight) at the unrestricted airfare of $180. 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 $3,500,000? 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.

number of discount tickets?

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