Management Accounting|Business Finance
The Flying Airlines company has been operating for five years and is currently in the process of
restructuring its operations due to the challenging conditions it is facing both in its local and
international operations. To this end it has asked you to advise it on the best course of action
and any concerns or problems it may encounter in each situation.
SITUATION 1
At Sydney Airport the company has a three year old loader truck which it uses to load meals on to
aeroplanes with the box being lifted hydraulically to the aeroplane’s side doors. The loader was
bought three years ago at $100,000 and is depreciated straight line to zero over its four year life – so
the loader has one year useful life remaining.
This loader could be sold now for $5,000. In addition to its annual depreciation of $25,000, the Flying
Airlines Company incurs $80,000 annually in variable operating costs to operate the loader.
The Operations Manager, Jack Steele, is facing a decision about replacement of the loader. A new
loader would cost $20,000 to purchase and would last for one year and would incur $50,000 in
annual variable operating costs.
REQUIRED
Based on the above costs what should the Flying Airlines do? Replace the loader truck with the
conveyor belt now or wait for another year and then replace the loader truck with the conveyor
belt? Show calculations and explanation. Ignore the time value of money.
SITUATION 2
Jenna Elfman, the Manager of Flight Scheduling for the Flying Airlines, is currently considering some
alternatives for its flights from Sydney to Hawaii. Currently the flight is non-stop but it is considering
having a stop in Fiji. She considers that the route would attract additional passengers if the stop is
made but that there would also be additional variable costs.
Currently the non-stop flight provides the following revenues and costs for the single flight:
Passenger revenue $240,000
Cargo revenue 80,000
Flight crew cost (2,000)
Fuel (21,000)
Meals and Services (4,000)
Aircraft maintenance (1,000)
Elfman has made some calculations concerning the effects the new flight route would have on
revenue and costs: If the alternative flight route was to be taken, the new route passenger revenue
would be $251,000 and cargo revenue remaining unchanged. The flight crew costs would increase to
$3,400 per flight and the fuel cost would increase to $26,000 per flight. The meals and services cost
would be $4,900 per flight. In addition it would cost $5,000 per flight to land in Fiji and the aircraft
maintenance costs would remain unchanged.
REQ UIRED
(A) On purely financial grounds should the Flying Airlines use the alternative flight route with
the stopover?
(B) Should other factors be considered? If so, please discuss.
SITUATION 3
Tony Khoury, the Vice President Operations for the Flying Airlines, has been approached by a
Japanese Tourist agency about obtaining a special tourist charter flight from Japan to Hawaii. The
tourist agency has offered the Flying Airlines $160,000 for a round trip flight. Considering the
airline’s usual airfares and occupancy the round-trip flight would provide revenue of $250,000.
The cost and revenue data from the usual japan to Hawaii are as follows:
Revenue
Passenger revenue $250,000
Cargo revenue 30,000
Total revenue 280,000
Expenses
Variable expenses of flight $90,000
Fixed costs allocated 80,000
Total expenses 170,000
Profit $110,000
If the charter flight is accepted there will be no cargo revenue, but there will be a reduction of
$5,000 in the variable costs due to savings in reservations and ticketing costs.
(A) If there is spare capacity should the special tourist charter flight be accepted purely on
financial considerations? Are there any other factors that need to be considered? If so,
please discuss.
(B) If there is no spare capacity and the tourist charter would have to take the place of an
existing flight should it be accepted on financial grounds in these circumstances? Should any
other factors be considered in these circumstances? If so, please discuss.
