Business Problem Solving Submitted By: Group 8 Trans Western Airline Case Section: C

Analysis of cost and revenue of Trans Western Airlines flight between Phoenix to Las Vegas.

Fixed cost:

1: Aircraft lease amount for 1 year = $38,00,000 / aircraft. 2: Ground service fixed cost for 1 year = $15,00,000.

Variable cost:

1: Salary = $400 / hour. 2: Fuel = $500 / hour. 3: Processing fee = $3 / passenger. Food & Beverages = $7.80 / passenger.

A: If five business flights and three tourist flights and offered each way every weekday, and ten tourist flights are offered each way every Saturday and Sunday.

5 Business flights from Phoenix to Las Vegas in a week. 10 Tourist flights from Phoenix to Las Vegas on every Saturday & Sunday. Capacity of aircraft is 120 passengers. Fare is $75 for business class and $40 for tourist travel. Flying time from Phoenix to Las Vegas is 45 minutes.

Number of flights: 50 Business flight + 30 tourist flight from Monday to Friday = 80 flights from two side. Hence, total 120 flights in a week. 50 Business flight and 70 tourist flight.

Hence, in total 50 business flights 70 tourist flight in a week.

Calculation of Revenue:

50 business flights X 120 passenger X business fare @ $75 + 70 tourist flight X 120 passenger X tourist fare @ $40.

= (50 X 120 X $75) + (70 X 120 X $40) / week.

= $450000 + $336000 / week.

= $786000 / week.

= $786000 X 52 = $40872000 / year.

Calculation of Variable cost:

= 120 flight X 120 Seats; = 14400 seats available in a week.

Business Problem Solving Submitted By: Group 8 Trans Western Airline Case Section: C

= Fuel cost for 90 hours @ $500 + 14400 Seats X Food & Beverage + 14400 X Processing fee + Salary @ $400 for 90 hours flying time / week.

= (90 X $500) + (14400 X $7.80) + (14400 X $3) + (90 X 400 )

= $4500 + $112320 + $43200 + $36000

= $196020 / week.

= $196020 X 52 = $10193040 / year.

Total cost = Fixed Cost + Variable Cost.

= Lease cost of 2 aircraft + Cost of ground services + Variable Cost. = $3800000 X 2 + $1500000 + $10193040 = $9100000 + $10193040 = $19293040 / year.

Profit/ (Loss) = Revenue – Total Cost.

= $40872000 − $19293040

= $21578960 Profit.

B: If Trans Western Airline operates the Phoenix to Las Vegas route. Its aircraft on that route will be idle between midnight and 6 am. The airline is considering offering a “Red Die” special, which would have Phoenix daily at midnight and return by 6 am. The marketing division estimates that if the fare were no more than $20, at least 60 new passengers could be attracted to each “Red Die” flight. Operating costs would be at the same rate for this flight, but advertising costs of $1225 / week would be required for promotion of the service. No food or beverage cost would be borne by the company.

Calculation of Revenue:

2 tourist flights X 60 passenger X business fare @ $20

= 2 X 60 X $20

= $2400 / day

= $2400 X 7 = $16800 / week.

= $16800 X 52 = $873600 / year.

Calculation of Cost:

= 2 flight X 60 Seats; = 120 passenger in a day.

Business Problem Solving Submitted By: Group 8 Trans Western Airline Case Section: C

= Fuel Cost @ $500 for 10.5 hour + 840 passenger X Processing fee + Salary @ $400 for 10.5 hours + Advertisement expenses of $1225. For 1 week.

= ($500 X 10.5) + (840 X $3) + (10.5 X 400) + ($1225)

= $5250 + $2520 + $4200 + $1225

= $13195 / week.

= $75670 X 52; = $686140 / year.

Profit/ (Loss) = Revenue – Total Cost.

= ($40872000 + $686140) – ($9100000 + $10193040 + $622440)

= $41558140 – $19915480

= $21642660.

Case analysis on the basis of PrOACT.

Problem

• There may be huge cost required to provide services to travellers and to pay salaries to pilots and crew members.

• There is no flight between Phoenix and Las Vegas from midnight to 6am.

Objectives

• To provide air service between midnight and 6am. • To attract more business class customers by providing them more service.

.

Alternatives

• Promotion of Red Die project, operate flights between 7am to 6pm. • They should Increase the number of flights for tourist Passengers during

weekends and midnight with low cost fares.

Business Problem Solving Submitted By: Group 8 Trans Western Airline Case Section: C

Consequences

• Fixed cost 1: Aircraft lease amount for 1 year = $38,00,000 / aircraft. 2: Ground service fixed cost for 1 year = $15,00,000.

• The minimum number of passengers travelling in a flight must be at least greater than 20 to overcome the total cost.

Trade-off

• It is the amount of the next best choice. The aircrafts remain idle between midnight to 6am. If Trans Western airline continue 2 flights between midnight to 6am, each flight for each aircraft. The company will have less profit in comparison with the first option.