National Carrier
Identify the problem in this case
In this case, the national carrier is seeking to improve its international operations with the aim of enhancing its participation within the industry. This is through reduction of the total cost while enhancing profitability levels of the carrier. The carrier faces stiff competition from other key players within the industry who have the ability to offer quality services to their consumers thus the achievement of competitive advantage. Due to this scenario, the organization seeks to determine the break-even point in relation to revenues and passengers to enhance the performance and profitability levels.
Tell management of the national carrier:
The break-even point in passengers per month
Fixed Cost divided by 1-average costs/fare
30, 150,000/ (1-700/1160)
30,150,000/ (1-0.6)
30,150,000/1.67
AED 18053892.22
The break-even point in revenues per month
Revenues = fixed cost + variable costs
Let the number of passengers to be X
This indicates that the total cost = 30, 150, 000 + 700 (X)
This illustrates that the break-even point in relation to revenue is AED 30, 150,000 + 700 (X).
If the management of the national carrier decides to increase passenger fares to AED 1,400 because the carrier’s average variable cost per passenger has increased by 10%, advise management of the new:
Break-even point in passengers per month
Fixed Cost divided by 1-average costs/fare
30, 150,000/ (1-770/1400)
30,150,000/ (1-0.55)
30,150,000/0.45
AED 67,000,000
Break-even point in revenues per month
Revenues = fixed cost + variable costs
Let the number of passengers to be X
This indicates that the total cost = 30, 150, 000 + 770 (X)
If the national carrier has budgeted AED85, 000, 000 as passenger revenues per month, what is the margin of safety considering your answer in (2.ii) and (3.ii) above?
In the answer to the second question, the break-even point in relation to revenue is 30, 150,000 + 700 (X). If the national carrier decides to budget at 85,000,000 as passengers revenues per month, the margin of safety relates to the budgeted amount minus the break-even point in revenues. This indicates that the margin of safety is 85,000,000-30,150,000-700 (X). This is estimated to be 54,850,000-700 (X). The margin of safety in relation to the second question is about 54,850,000-700 (X).
In the answer to the third question, the break-even point in relation to revenue is 30, 150,000 + 770 (X). If the national carrier decides to budget at 85,000,000 as passengers revenues per month, the margin of safety relates to the budgeted amount minus the break-even point in revenues. This indicates that the margin of safety is 85,000,000-30,150,000-770 (X). This is estimated to be 54,850,000-770 (X). The margin of safety in relation to the second question is about 54,850,000-770 (X).
Referring to your answer to question (4), which alternative presents the national carrier with more risk? Explain your answer in relation to margin of safety.
The first scenario or alternative presents the national carrier with more risks. This is because it does not carter for the increase or decrease in the cost of transportation thus the movement of the variable costs. The national carrier should adopt and implement the second alternative because of its minimal margin of safety value thus essence of minimal risks in the process of executing roles and quality services to the passengers. The national carrier will increase its profitability levels with adoption of the second alternative.
