As a marketing manager for an airline, would you sell a seat...

Name: Problem 19, Chapter 4: Fundamentals of Cost Accounting
Uploaded: 2021-02-16T02:35:46-08:00
Duration: 6 min 7 s
Channel: Oluwadamilola Ameobi
Description: As a marketing manager for an airline, would you sell a seat to a passenger who walked up to the gate at the last minute at the variable (marginal) cost? Why or why not? Do the costs from the accounting system include all relevant costs for the decision?

As a marketing manager for an airline, would you sell a seat to a passenger who walked up to the gate at the last minute at the variable (marginal) cost? Why or why not? Do the costs from the accounting system include all relevant costs for the decision?

Key Concepts

Economic versus Accounting Costs

Economic costs include both the explicit recorded costs in financial statements and the implicit costs such as opportunity costs. In many cases, standard accounting costs do not capture all relevant factors for decision-making, which is why managers need to look beyond the accounting figures and consider the full economic implications when pricing and capacity decisions are made.

Opportunity Cost

Opportunity cost is the benefit foregone by not choosing the next best alternative. When deciding to sell an extra seat at a marginal rate, the analysis should include the lost opportunity of potentially selling that seat at a higher price if there is demand, balancing between immediate revenue and future opportunities.

Fixed and Variable Costs

Fixed costs, such as salaries, leases, and equipment, do not change with the level of output while variable costs fluctuate with service provision. In many pricing decisions, only variable costs should be considered when evaluating whether to fill extra capacity, since fixed costs have already been incurred and are not affected by selling one more seat.

Marginal Cost

Marginal cost is the additional cost incurred from serving one more customer. In decision-making, especially for services like airlines, it is crucial to consider the variable or incremental costs of providing an extra seat, irrespective of the fixed costs that remain unchanged regardless of passenger count.

Transcript

00:01 This question says that the cost of flying a passenger plane from point a, the cost of flying from a to point b is $50 ,000 and the airplane flies this route four times per day.

00:19 So they fly this route at 7am, 10 a .m., 1 p .m., and 4 p .m.

00:29 Now, the first and last flights, which is 7 a .m.

00:31 And 4 p .m., are filled to capitol.

00:33 Capacity with 2 40 people right so the second and third one which is this and this are only half few only half full so these two are half full now find the average cost per passenger for each flight and suppose that the airlines hires you as a marketing consultant and wants to know which type of customer it should attract the peak the off -peak customer the middle two flights or the rush hour customer first and last flight.

01:14 So basically you're to find the average cost per passenger and you're to figure out what type of customer should attract and what advice you offer.

01:24 So let's start with the first question.

01:26 The average cost will be calculated as average cost is equal to total cost divided by the quantity.

01:42 Now the average cost per passenger for flights at 7am and 4 p .m., which is the last two, because we're giving that there are 240 people for that.

01:52 So the average cost per passenger for 7 a .m.

02:01 And 4 p .m.

02:03 Would be equals to 50 ,000 because the total cost would be 50 ,000.

02:14 And they were given the quantity, which is 240 people.

02:19 So this equals to 208 .3.

02:23 Now, the average cost per passenger for flights, 7 a .m.

02:36 So the average cost for the second one which is 10 a .m.

02:41 And 1 p .m.

02:42 Because they said that it's half full, we can assume that it would be 240 divided by 2.

02:48 So that will be 120 people.

02:50 Right.

02:51 So now the average cost for 10 a .m.