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ACC202 Situational Analysis In Decision Making For Flying Company

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Question:

Based on the above costs what should the Flying Airlines do? Replace the loader truck with the conveyor belt now or wait for another year and then replace the loader truck with the conveyor belt? Show calculations and explanation. Ignore the time value of money.

 

Introduction

Flying Airlines has been approached by the Japanese Tourist Agency for obtaining the special chartered flight for the tourism purpose. To accept the offer, the company will have to evaluate the profitability of this special offer. Apart from the financial results of the offer, other factors may also be considered by the company. The tourist agency is ready to pay $ 160000 for the chartered file to the Flying Company. But, in that case the company will not have any cargo revenue. However, the variable costs will be reduced by $5000.

In case where there is space capacity available with the company following analysis can be undertaken on financial ground:

 

 Offer price (Revenue)

 $          1,60,000.00

 Less

 Revised Variable cost

 $              85,000.00

 

 

 $              75,000.00

 Less

 Lost cargo revenue

 $              30,000.00

 

 Net benefit from special offer

 $              45,000.00

Note: The allocated fixed cost is irrelevant in the decision making as it will be incurred in either cases whether the spare capacity is utilised or not (Zimmerman & Yahya-Zadeh, 2011).

Conclusion: On the basis of above calculation it can be observed that even if there is a loss of revenue the flying airlines company will be benefited. There will be a profit of $45000 if the spare capacity will be used. Therefore, on the financial ground it is reasonable to accept the special offer of tourist agency.

However, this decision must not be only based on the financial factors. Rather, other factors must also be considered in this type of decision making such as:

The goodwill of the tourist agency and its history will have to be accessed before entering into any contract with it for the provision of chartered flight. Since if the agency is not reliable, it may cause heavy damage to the business of flying airlines. Also, if the tourist agency has sound goodwill in the market, it can promote the reputation of flying airlines in the market. Also, the competitor’s prices in the similar transactions must also be considered. It shall also be taken into account that whether it is legally permissible for the flying airlines to enter into contracts (Priemus, Flyvbjerg & van Wee, 2008). 

 

Part B

When there is no spare capacity available with the company, it will have to compromise with its existing demand in the market to fulfil the special offer of tourist agency (Horngren, 2009). The analysis will be undertaken in the following way:

 

 Profitability in existing operations

 Profitability under special offer

Passenger Revenue

 $  2,50,000.00

 $  1,60,000.00

Cargo Revenue

 $      30,000.00

 $                     -   

Total Revenue (a)

 $  2,80,000.00

 $  1,60,000.00

 

 

 

Variable cost of the flight

 $      90,000.00

 $      85,000.00

Fixed costs allocated

 $      80,000.00

 $      80,000.00

Total Expenses (b)

 $  1,70,000.00

 $  1,65,000.00

 

 

 

Profit (a-b)

 $  1,10,000.00

 $      -5,000.00

Conclusion:

The company must not accept the offer of tourist agency of chartering the special flight between Japan and Hawaii as it will not result in increased profitability of the company. Rather, the company will have to incur a loss of $ 5000.

Other factors that needs to be considered in case of decision making about acceptance or rejection of special offer of tourist agency.

The time for which the flight will be given by the company to the tourism agency for the hiring purposes of chartered plane.

The extent of disturbance in the existing operations of company if such flight is unavailable and the number of other flights available and their capacity.

The seasonality of the tourism industry for the period for which the flight will be hired out to the tourism agency. 

 

References:

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Priemus, H., Flyvbjerg, B., and van Wee, B. 2008. Decision-making on Mega-projects: Cost-benefit Analysis, Planning and Innovation. Edward Elgar Publishing.

Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in Accounting Education, 26(1), pp.258-259.

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