Discussion Questions

1. What is the distinction between marginal cost and incremental cost? (b) How are sunk costs treated in managerial decision-making? Why?

2. What are the aim, usefulness, and shortcomings of (a) cost- volume- profit analysis and (b) the concept of operating leverage?

Problems

3. Airway Express has an evening flight from Los Angeles to New York with an average of 80 passengers and a return flight the next afternoon with an average of 50 passengers.

The plane makes no other trip. The charge for the plane remaining in New York overnight is $1,200 and would be zero in Los Angeles. The airline is contemplating eliminating the night flight out of Los Angeles and replacing it with a morning flight. The estimated number of passengers is 70 in the morning flight and 50 in the return afternoon flight. The one- way ticket for any flight is $200. The operating cost of the plane for each flight is $11,000.

The fixed costs for the plane are $3,000 per day whether it flies or not. (a) Should the airline replace its night flight from Los Angeles with a morning flight (Calculate and compare the profit under each flight)? (b) Should the airline remain in business (is asking: should Airway Express continue providing the flight between Los Angeles and New York? Even if Airway Express decides not to fly, it still has to pay the fixed costs of $3,000 per day. The evening flight with the return flight the next afternoon is counted as 1 day, not 2 days)?