P 7-4 The Corporate Jet
A large corporation maintains a fleet of three 30-passenger corporate jets that provide (weather permitting) daily scheduled service between Detroit and several cities that are home to its production facilities. The jets are used for business, not personal, travel. Corporate executives book reservations through a centralized transportation office. Because of the limited number of seats available, the planes almost always fly full, at least in the nonwinter months. Excess demand for seats is assigned by executive rank within the firm. The executive’s budget is charged for the flight at the end of the month. The charge is based on the jet’s total operating expenses during the month (including fuel, pilot’s salary and fringes, maintenance, licensing fees, landing fees, and 1/12 of the annual accounting depreciation) divided by the actual passenger miles logged in the month. This rate per passenger mile is multiplied by each passenger’s mileage flown in the month.
Required:
a. Describe the formula being used to calculate the cost per passenger mile flown. - The allocation of corporate costs is in form of transfer pricing within the firm. Since most cost allocation problems involve transfer pricing problems, in this problem, the formula being used consists of monthly expenditures for both fixed and variable costs divided by actual miles flown.
b. As passenger miles flown increases, what happens to the cost per passenger mile? - The average price charged falls with the rising numbers of passenger miles. Therefore, the variable costs will increase while the fixed cost is fixed, resulting in the decrease in average price charged.
c. Describe what causes the monthly charge per passenger mile flown to fluctuate. - The fluctuation of monthly charge per passenger mile flown is the consequence of the number of plane flying and the attendance