Q7. The cost of flying a passenger p... [FREE SOLUTION]

Chapter 7: Q7. (page 280)

The cost of flying a passenger plane from point A to point B is $50,000. The airline flies this route four times per day at 7 am, 10 am, 1 pm, and 4 pm. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full. Find the average cost per passenger for each flight. Suppose the airline hires you as a marketing consultant and wants to know which type of customer it should try to attract鈥攖he off-peak customer (the middle two flights) or the rush-hour customer (the first and last flights). What advice would you offer?

Short Answer

Expert verified

The average cost per passenger for the first and last flights is $208.3334. The average cost per passenger for the middle flights is $416.6667.

The airline must target off-peak customers for the middle flights.

Step by step solution

Average cost per passenger

The average cost is the cost per unit of output. It is calculated as the ratio of the total cost to the total output.In the case of a passenger plane, the output is the number of passengers receiving the service.

Case 1: Average cost per passenger for the first and last flights

$A C = \frac{T o t a l C o s t}{T o t a l P a s s e n g e r s} = \frac{$ 50, 000}{240} = $ 208.334$

Thus, the average cost per passenger for the first and last flights is $208.3334.

Case 2: Average cost per passenger for the second and third flights

Since the second and third flights are half-filled, the total number of passengers is 120 (= 240/2).

$A C = \frac{T o t a l C o s t}{T o t a l P a s s e n g e r s} = \frac{$ 50, 000}{120} = $ 416.6667$

The average cost per passenger for the second and third flights is $416.6667.

Choice between off-peak customer or the rush-hour customer

The airline should attract off-peak customers for the second and third flights because there鈥檚 excess capacity in the middle flights.Also, the marginal cost for carrying each additional passenger will be negligible. It will increase the airlines鈥� profit even if the price for tickets falls below the cost because the $50,000 cost is already recovered.

The extra amount of money from off-peak customers will contribute to the airlines鈥� profit. Hence, the airline should attract off-peak customers.