458 ACCOUNTING FOR MANAGERS
Table A4.1 Swift Airlines
Outbound Inbound Total
Revenue 14,195 15,500 29,695
Costs per passenger 87 @ £25 120 @ £25
2,175 3,000 5,175
Costs per flight 7,500 7,500 15,000
Costs per route 2,000 2,000 4,000
Controllable costs 11,675 12,500 24,175
Contribution to head office overhead 2,520 3,000 5,520
Head office costs 3,000 3,000 6,000
Profit/-loss − 480 0 − 480Contrary to the route manager’s belief, the loss is £480, not £1,305. This is
because she did not take account of the per passenger variable cost of £25. This
reduces the costs by £825 per flight (120− 87 =33 @ £25).
While the additional revenue of £600 would help, the route manager has also
overlooked the additional per passenger variable cost of £25. Each passenger
would therefore contribute £15 to profits (£40−£25), a total of £225, although this
is only half the loss.
It is important to identify the relevant costs. On a per passenger basis, the
relevant cost is £25 as that is the only extra cost to cover the additional fuel,
insurance, baggage handling etc. The relevant costs for the Nice destination are
the flight costs of £7,500 (£15,000 for the outbound and inbound legs) and £4, 000
for the costs that support each route. If the route were discontinued, Swift would
save £11,500, particularly as it could reassign the aircraft and crew costs to another
route. The £3,000 allocation of business overhead (£6,000 for the return flight)
are not relevant costs as those costs would not be saved, but would have to be
reallocated to other routes.
Importantly, the route still makes a positive contribution to the recovery of
head office overheads, which are allocated over each route. The route manager
still needs to address the capacity utilization problem and the average price
needed to generate a profit on each flight. The average price based on Swift
Airlines’ model is £175 (£21, 000 /120). The average price being achieved on the
outbound route is £163.16 (£14, 195 /87). There is a likely trade-off between price
and volume (of passengers).
The breakeven per flight can be calculated based on fixed costs of £12, 500
(£7, 500 +£2, 000 +£3,000) and variable costs of £25 per passenger. A range of
breakeven prices can be calculated.
The breakeven price for 120 passengers is:
12 , 500
120 (P−25)
P=£129. 17