Problem:
Michael Bordellet is the owner/pilot of Bordellet Air Service. The company flies a daily round trip from Seattle's Lake Union to a resort in Canada. In 2010 the company recorded an annual income before taxes of $8,083 although that included a deduction of $70,000 reflecting Michael's "salary".
Price $360
Passengers 1,248
Revenue $449,280 360*1,248
Costs
Pilot (owner's salary) $70,000
Fuel (35,657 gallons x $4.15) $147,977
Maintenance (Variable) $127,920
Depreciation of plane $25,000
Depreciation of Office Equipment $2,800
Rent Expense $40,000
Insurance $20,000
Miscellaneous (fixed) $7,500
Total Cost $441,197
Income before Taxes $8,083
Revenue of $449,280 reflects six round trips per week for 52 weeks with an average of four passengers paying $360 each per round trip (6 x 52 x 4 x $360 = $449,280). The flight to the resort is 400 miles one way. With 312 round trips (6 per week x 52 weeks), that amounts to 249,600 miles. The plane averages 7 miles per gallon.
a. How many round trips is Michael currently flying, and how many round trips are needed to break even?
b. How many round trips are needed so that Michael can draw a salary of $110,000 and still not show a loss?
c. What is the average before-tax profit of a round trip flight in 2010?
d. What is the incremental profit associated with adding a round-trip flight?