Airline Capacity & Special Offer Analysis

This assignment requires you to analyze the financial feasibility of an airline accepting a special offer from a Japanese tourist agency. You'll need to calculate total revenue, variable expenses, allocated fixed costs, and overall profit (or loss) based on the provided data. The analysis should also take into account the company's spare capacity and determine if accepting the offer would be financially beneficial.

Running Head: Management Accounting
Replacement Decision making

Management Accounting 2
Table of Contents
Situation 1.............................................................................................................................................3
Introduction:......................................................................................................................................3
Analysis:............................................................................................................................................3
Conclusion:........................................................................................................................................4
Situation 2.............................................................................................................................................5
Introduction:......................................................................................................................................5
Part A................................................................................................................................................5
Conclusion:........................................................................................................................................6
Part B.................................................................................................................................................6
Situation 3.............................................................................................................................................8
Introduction:......................................................................................................................................8
Part A................................................................................................................................................8
Part B...............................................................................................................................................10
References:..........................................................................................................................................11

Management Accounting 3
Situation 1
Introduction:
The present case is about one of the flying airlines company which wants to take the
replacement decision as its old truck loader is having remaining useful life of one year so the
company wants to replace the old loader with a new loader. The new loader can be purchased
for $ 20000, the company will get $5000 from the sale old loader so we can say the cost of
new loader will require an additional cash outflow of $15000 that is cost of new loader
$20000 (-) proceeds from the sale of the load loader $5000. The new loader is more efficient
in its working as the variable cost for new loader is $ 50000 and the variable cost of old
loader is $80000. That means with the installation of new loader a savings in variable cost is
there of $30000. The savings in cost is equivalent to inflow of cash in financial terms.
Analysis:
Here we present the analysis of both the loader’s:
Analysis of Old Loader
Particulars Amount
Cost of Loader $ 1,00,000.00
Useful Life 4
Depreciation $ 25,000.00
Salvage Value $ 5,000.00
Annul cash Flow (Year 1 to
4) $ 80,000.00

Management Accounting 4
Analysis of New Loader
Particulars Amount
Cost $ 20,000.00
Cash Outflow (Variable cost) $ 50,000.00
Initial Investment
Cost of acquisition $ 20,000.00
Less: Amount realised from the sale of old
Loader $ 5,000.00
Net Outflow $ 15,000.00
Less: Decrease in Variable cost $ 30,000.00
Net Savings in Cost (in the year of purchase) $ 15,000.00
Conclusion:
With the above analysis we can see that there is net savings of $15000 with the installation of
the new loader as savings I cost is equal to cash inflow. Hence, we should recommend
replacing the old loader with the new loader immediately that is at the end of 3rd year of the
useful life of old loader. If we wait for the 4th year to end then the sale value of old loader will
be zero that means savings in the cost will also reduce that is why we highly recommend the
company to replace the old loader with the new loader as of now only.

Management Accounting 5
Situation 2
Introduction:
The current case is about the airline company which wisher to opt an alternative route for the
flights which operate in between Japan and Hawaii. The present route of the flight is without
any stop that is the flights are brakeless. If the company runs the flight with a break journey
and takes the stop at Fiji airport then it will have more passengers traveling with the same
flight. So, the company wants to analyse the profitability in both the situation as if the flight
rout remains the same that is it starts from Japan and ends at Hawaii or if the flight has one
stop in between covering the three stops that is Japan, Fiji and Hawaii.
Part A
The analysis under both the situation is shown below:
Statement of Profit of existing route
Passenger Revenue $ 2,40,000.00
Cargo Revenue $ 80,000.00
Total Revenue $ 3,20,000.00
Crew Cost $ -2,000.00
Fuel Cost $ -21,000.00
Meals and services $ -4,000.00
Aircraft
Maintenance $ -1,000.00
Total cost $ -28,000.00
Net profit $ 3,48,000.00

Management Accounting 6

Management Accounting 7
Statement of Profit of new Route
Passenger Revenue $ 2,51,000.00
Cargo Revenue $ 80,000.00
Total Revenue $ 3,31,000.00
Crew Cost $ -3,400.00
Fuel Cost $ -26,000.00
Meals and services $ -4,900.00
Aircraft
Maintenance $ -1,000.00
$ -5,000.00
Total additional cost $ -40,300.00
Net profit $ 2,90,700.00
Conclusion:
From the above analysis it is clear that the existing route is more profitable for the company
as the profit from existing route is $ 348000 and the profit from the new route is $ 290700. If
we think purely on financial grounds then it is not recommended to the company to change its
route and continue to operate on the same route as it is more profitable for the company.
Part B
The other things that need to be considered other than the financial factors before taking the
decision to change the flight route and add one stop in the route that is at Fiji port. The other
factors that need to be considered are:

Management Accounting 8
Route Traffic:
The Japan and Hawaii route has very heavy traffic that can cause the flights to get delayed
and because of that the passengers will face too many problems and that will cause
dissatisfaction among passengers. That is why the company must evaluate the traffic
conditions on such route (Stevenson and Hojati, 2007).
Legal Factors:
The company need to take licences to operate the flights on such routes and need to take
permit to enter into the country boundaries. That is why before changing the route of the
flight the company need to take these legal factors in purview (Puterman, 2014).
Passengers Demand:
The company need to analyse as if more passengers will add to travel in the flight and the
demand of passengers as well because a company not only operates for earning profit but also
to meet its social and ethical duties (Thornton, Ocasio and Lounsbury, 2015).
Environmental Factors:
It is very important to have a look over the environment for the new route as the environment
impacts the operations of the company. It is very important for the company to consider
environment on the top priority and bad environment conditions can cause heavy injuries to
the passengers and the flight too (Nahmias and Cheng, 2009).
Competitive Forces:
The company need to consider on priority the market completion as other companies flights
are operating on that route and the revenue that they generate by operating on that route.

Management Accounting 9
Situation 3
Introduction:
In the present case a Japanese tourist agency did approaches the operators of the flying
airlines to give them on rent a charter flight. The rent they need to pay for that flight is
$160000. The airline company need to consider various other factors before deciding whether
to accept or decline the offer of the tourist agency. The company also need to take into
account as if they take the charter on rent then the cargo revenue need to be compromised by
the company.
Part A
The financial analysis is presented below:
Statement of profit (Existing situation)
Particulars Amount Amount
Passenger Revenue $ 2,50,000.00
Cargo Revenue $ 30,000.00
Total Revenue (B) $ 2,80,000.00
Variable expenses of the
flight $ 90,000.00
Fixed costs allocated $ 80,000.00
Total Expenses (A) $ 1,70,000.00
Profit (A-B) $ 1,10,000.00

Management Accounting 10
Statement of profit (Special Offer)
Particulars Amount
Revenue from Special offer $ 1,60,000.00
Less: Variable cost ($90000-
$5000) $ 85,000.00
$ 75,000.00
Loss of cargo revenue $ -30,000.00
Net Revenue $ 45,000.00
* The allocated fixed cost is irrelevant cost for decision making. Hence, we ignored the same
(Bierman Jr and Smidt, 2012).
With this analysis we can see that the special offer of the tourist agency gives the net revenue
of $45000. Hence, if the company has spare capacity then it should accept the offer of the
travel agency and must take on rent the charter to get extra revenues.
The other factors that can be considered to use the spare capacity as if we do not use the spare
capacity that will lead to machine idealisation and this will lead to machine deterioration.
The demand of passenger need to be considered as the demand will increase in future or
decrease in future. If there are chances of increase in the demand of the flight, then the
company will not accept the special offer (Jardine and Tsang, 2013).
The time period for which the tourist agency requires the charter must also be considered
before taking any decision.

Management Accounting 11
Part B
Usual Revenues and costs New contract Revenues and
costs
Particulars Amount Amount Amount Amount
Passenger Revenue $ 2,50,000.00 $ 1,60,000.00
Cargo Revenue $ 30,000.00
Total Revenue (B) $ 2,80,000.00 $ 1,60,000.00
Variable expenses of
the flight $ 90,000.00 $ 85,000.00
Fixed costs allocated $ 80,000.00 $ 80,000.00
Total Expenses (A) $ 1,70,000.00 $ 1,65,000.00
Profit (A-B) $ 1,10,000.00 $ -5,000.00
The above analysis depicts that if company does not have spare capacity the company should
not accept the special offer of the Japanese tourist agency. From the above analysis we can
see that if company accepts the offer without having spare capacity then it will incur a loss of
$5000.
Other factors that need to be considered are:
The market reputation of the tourist agency as if the market reputation of the Japanese tourist
agency has a good track record, then only company will associate with the Japanese agency
as this will increase its goodwill in the market (Hwang and Masud, 2012).
The airlines company need to know the legal regulations implied if they accepts the offer and
what other legal requirements they need to follow.