Relevant Information for Decision-Making Relevant Costing Problems Operating Income that West coast Air Earns on each one-way flight between San Francisco and Fiji Operating income is the income obtained after deducting total operating expenses from total revenue in a given period of time. The total operating income for West coast is as follows: Income from Air Tickets (175*325) 56,875 Less: Total Costs: -Total Fixed Costs (7500 + 7000) = 14,500 -Variable Fuel Costs =14,000 -Food and Beverage Costs (4*175) = 700 -Commission to travel Agents (10% * 56,875) = 5,687.50 Total Costs (34,887.50) Total Operating Income 21,987.50 2.
Whether West Coast Should Lower its Ticket Fares or Not Lowering of ticket fares could act to increase revenue or lower revenue in the long-run. Calculations to show this are as follows: Income from Air Tickets (280*212) 59,360 Less: Total Costs: -Total Fixed Costs (7500 + 7000) = 14,500 -Variable Fuel Costs =14,000 -Food and Beverage Costs (4*212) = 848 -Commission to travel Agents 10% * 59,360 = 5,687.50 Total Costs (35284) Total Operating Income 24,076 The company should lower its ticket fares.
This is because in lowering its ticket fares from three hundred and twenty-five US dollars to two hundred and eighty US dollars, revenue or operating income increases from $21,987.50 to $ 24,076. This is ideal because most companies always aim to maximize profits. 3. Whether West Coast Should Accept the offer of Leasing out its Jet to Travel International In order to determine whether the offer is suitable or not, the company should evaluate if doing so would increase its revenue.
Computation to support this is as follows: Income from Travel International 59,360 Less: Total Costs: -Total Fixed Costs (7500 + 7000) = 14,500 -Commission to travel Agents 10% * 75,000 = 7,500 Total Costs (22,000) Total Operating Income 53,000 Therefore, West Coast should rent out its jet to Travel International.
This is so because in leasing it out, revenue increases from $ 21,987.50 to $ 53,000. This reflects an almost double increase in revenue or operating profit. Thus, this would be a noble project which should be undertaken (Williams, 2008). Other factors the company should consider in deciding on whether or not to lease out its plane to travel international. In renting out its plane, West Coast should consider certain factors.
This would in turn help the company make proper decision that would not result in regret after the whole undertaking. These factors include the following: Objective of the company- The Company should evaluate carefully the reason behind its decision. The objective would be to maximize its revenue or to check if it should be permanently leasing out the plane. Without a clear, objective, the decision would turn out to be harmful to the company, maybe even losing out a larger percentage of its market share (Baye, 2010). Legal Issues on renting- The Company should carefully evaluate the legal issues that would concern the decision.
For example, the management should weigh out the steps to take in case Travel International does not meet the costs it promised to cover, like fuel costs and all food costs. At the same time, there could be carelessness on the part of the lessee. They could not take utmost care while operating the plane, thus leading to break-downs. Past history of the client- The company should also evaluate the past history or record of the lessee.
The company to which the plane is being leased could be having bad reputation in terms of keeping promises or paying its debts. Therefore thorough due diligence should be done to assess the worthiness of the lessee. This will also create a good working relationship with the companies from whom information was derived. Future Plans of the Company- the company could be having a different plan regarding the future of the company.
For example, the company may float the idea of leasing out the planes instead of managing it itself in order to generate revenue (Baird, 1989). Therefore, this could be used as a pilot survey to test the viability of that plan. Customers’ demand- The demand for the planes would be so high such that leasing out would not meet the customers’ demand. This is so because when West Coast leases the plane out to Travel International, the plane carrying capacity is reduced from two hundred and eight flights to one hundred and eighty four.
This would lead to some customers getting stranded by not getting the flight services, thereby opting to switch to other air lines that could provide enough travel space. References Baird, B. F. (1989). Managerial decisions under uncertainty: an introduction to the analysis of decision making. New York: Wiley. Baye, M. R. (2010). Managerial economics and business strategy (7th ed. ). New York: McGraw-Hill/Irwin. Williams, J. R. (2008). Financial & managerial accounting: the basis for business decisions (14th ed. ). Boston: McGraw-Hill/Irwin.