446 ACCOUNTING FOR MANAGERS
Business overhead £3,000 (allocation of head office
overhead)
Total £15,500This 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 £300Revenue 87 £14,195The 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 travellers,
or stand-by fares, which are usually over-subscribed. 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.
This question particularly relates to an understanding of Chapters 8 and 9.
Case study 3: Holly Road Farm Produce Ltd
Holly Road is a farm employing 100 people, 60 of whom are agricultural specialists,
35 unskilled labourers and 5 clerical staff. The salary and related costs are shown
in Table A3.3.
Due to a decline in business as a result of increases in sales of organic crops
by competitors, the company is going to make 40% of its employees redundant,
reducing each grade of employee equally. Holly Road will use its remaining
employees over the next 12 months to change its production methods to be able
to compete with organic crops. Although none of the employees is unionized,