Assignment
As a production manager for Swift Airlines and based upon the information provided in the case study, I do not recommend the changes of implementing a 48-hour ticket purchase if fares are introduced at £40.00. I do not recommend this proposed introduction of 48-hour ticket purchases because the cost of quality would be based upon if all 15 seats are sold per flight. According to Collier (2015), the cost of quality (COQ) is the difference between the actual costs of production, selling, and after-sales service and the costs that would be incurred if there were no failures during production or usage of products/services (p. 239). Swift Airlines will need to improve the cost of quality which contribute from both internal and external setbacks; through these changes of improvement, Swift Airlines will regain its market share of £5,500 profit. For example, although expenses are not changing, I do not give the green light for this newly proposed fare because Swift Airlines will still incur a lost. If 13 tickets of the proposed 15 tickets are not sold, Swift Airlines are faced with experiencing an even bigger revenue lost.
Total quality management (TQM) which describes Swift Airlines long-term success through customer satisfaction. It is imperative that Swift Airlines focuses on providing excellent customer service at a premium price which will increase profits and decrease cost. The TQM total is £15,000 which includes the cost per passenger, flight costs, route cost and business overhead. The cost of quality for the flight for Nice to London is significantly high in the outbound leg. Swift Airlines should focus on ending the practice of awarding business on the basis of price tag; but instead on minimizing the total cost. The introduction of a 48-hour ticket will not solve the complete problem of losses generated from the outbound flight. In order to improve TQM, Swift Airlines should focus on continuous improvement of their reputation in the marketplace rather than engage in price tag bidding wars with other competitors which could potentially increase more revenue loss and higher TQM cost. By focusing specially on exceeding customer expectations in quality, the name, image and reputation increases. Although, the 48-hour ticket could potentially reduce loss if all proposed 15 tickets are sold.
Swift Airlines should implement Statistical Process Control (SPC) tools which will provide the measurement and control quality during the entire end to end flight process. The data provided from SPC will indicate if everything is operating as expected and if any variations within control limits are likely due to a common cause. For example, if data falls outside of the control limits, this will indicate that an assignable cause is likely the source of the revenue loss and something within the process should be changed to fix the issue before other revenue issues occur. Statistical Process Control will enable Swift Airlines with the capability to find other profitable ways to increase revenue. A profitable consideration may be using a smaller plane to ensure that all tickets are sold during the outbound leg flight or closing that specific route. The six sigma which is generally fact-driven will eliminate the defects in the market and allow for Swift Airlines to achieve its profit of £5,500 if all six steps are followed correctly. Six sigma will assert improvement in all processes and describe quantitatively how operational processes are performing in order to improve customer satisfaction and the outbound flight. The relevant cost for Swift Airlines are incurred based upon business decisions and this cost in completely avoidable.
"Assume, for example, a passenger rushes up to the ticket counter to purchase a ticket for a flight that is leaving in 15 minutes, and the airline needs to consider the relevant costs to make a decision about the ticket price. Almost all of the costs related to adding the extra passenger have already been incurred, including the plane fuel, airport gate fee and the salary and benefits for the entire plane's crew. Because these costs have already been incurred, none of the costs are relevant. The only additional cost is labor to load the passenger's luggage and any food that is served, so the airline bases the ticket-pricing decision on just a few small costs" (Investopedia, 2017). In regard to sunk cost, Swift Airlines has to take into account the relevant cost that includes the future cost and revenue based upon this new 48-hour ticket purchase.
The sunk cost has founded Swift Airlines (cost already incurred and cannot be recovered) and should be considered as an issue that can be eliminated if a detailed study of cost is provided which can be determined by six sigma. Lastly, the cost-volume profit (CVP) will help Swift Airlines understand how changes in cost and volume will affect business operating's and net income. A cost volume profit analysis will analyze the 48-hour ticket breakeven point of cost and volume of tickets sold. This information will be vital for the production manager making short-term economic decisions. Better analysis of these factors by Swift Airlines will enable it to maintain their profits without considering the recommendation of a 48-hour ticket.
References:
Collier, P. M. (2015). Accounting For Managers: Interpreting Accounting Information for Decision Making, 5th Edition. [Argosy University].
Investopedia. (2017). Relevant Cost. Breaking Down Relevant Cost.
ORIGINAL QUESTION:
Using this case study, take the role of the production manager and prepare a report for the board that either recommends the proposed changes or does not recommend the changes. Support your position with details from the case and also from information from the text or other outside references.
Make sure your original answer explains the following in your own words:
• Cost of Quality
• Total Quality Management (TQM)
• Statistical Process Control (SPC)
• Six Sigma
• Relevant Costs
• Sunk Costs
• Cost Volume Profit (CVP)
Case
Just in case you are having trouble bringing up the case, here is the only case in Chapter 11.
Case study question: Swift Airlines Swift Airlines has a daily return flight from London to Nice. The aircraft for the flight has a capacity of 120 passengers. Swift sells its tickets at a range of prices. Its business plan works on the basis of the following mix of ticket prices for each day's flight:
|
Business
|
30 @ £300
|
£9,000
|
|
Economy regular
|
40 @ £200
|
£8,000
|
|
Advance purchase
|
20 @ £120
|
£2,400
|
|
7-day-purchase
|
20 @ £65
|
£1,300
|
|
Stand-by
|
10 @ £30
|
£300
|
|
Revenue
|
120
|
£21,000
|
Swift's head office accounting department has calculated its costs as follows:
Cost per passenger (to cover additional fuel, insurance, baggage handling etc.) assuming full load £25 per passenger
Flight costs (to cover aircraft lease, flight and cabin crew costs, airport and landing charges etc.) £3,000 (120 @ £25) £7,500 per flight
Route costs (to cover the support needed for each destination) £2,000 (based on ½ of the daily cost of £4,000 (balance charged to return flight)) Business overhead £3,000 (allocation of head office overhead)
Total £15,500
This results in a budgeted profit of £5,500 per flight, assuming that all seats are sold at the budgeted price. The head office accountant for European routes has advised the route manager for Nice that while the Nice-London inbound leg is breaking even, losses are being made on the London-Nice outbound leg. If profits cannot be generated, the route may need to be closed, with the aircraft and crew being assigned to another route. The route manager for Nice has extracted recent sales figures, a typical flight having the following sales mix:
|
% of tickets sold Business
|
60
|
18 @ £300
|
£5,400
|
|
Economy regular
|
70
|
28 @ £200
|
£5,600
|
|
Advance purchase
|
80
|
16 @ £120
|
£1,920
|
|
7-day purchase
|
75
|
15 @ £65
|
£975
|
|
Stand-by
|
100
|
10 @ £30
|
£300
|
|
Revenue
|
87
|
|
£14,195
|
The route manager has calculated a loss on each outbound flight of £1,305. She believes that there is a market for 48-hour ticket purchases if a new fare of £40 was introduced, as this would be £5 less than the price charged by a competitor for the same ticket. She estimates that she could sell 15 seats per flight on this basis. This would not affect either the 7-day purchase, which is used by business travelers, or stand-by fares, which are usually oversubscribed. The additional revenue of £600 (15 @ £40) would cover almost half the loss. The route manager has prepared a report for her manager asking that the new fare be approved and allowing her three months to prove that the new tickets could be sold. Comment on the route manager's proposal. Case studies provide the reader with the opportunity to interpret and analyze financial information produced by an accountant for use by non-accounting managers in decision-making. There is a suggested answer for the case in Part IV, although the nature of case studies is that there is rarely a single correct answer, as different approaches to the problem can highlight different aspects of the case and a range of possible approaches are possible.