Airline Special Offer Decision Analysis

This assignment presents a scenario where an airline company is offered a special deal by a Japanese tourist agency to charter a plane. Students must analyze the financial implications of accepting this offer, considering revenue, variable expenses, fixed costs, and potential profit. The analysis should also factor in non-financial aspects like market reputation, legal requirements, and spare capacity limitations.

Running Head: Management Accounting
REPLACEMENT DECISION
MAKING

Management Accounting 1
Situation 1
Introduction:
In this case the flying airlines company is considering to replace its old truck loader with a
new one. The new loader will cost it for $ 20000. However, it will realise $ 5000 on sale of
old loader. Therefore, the net cost it will have to incur for the purchase of proposed loader
will be $ 15000. Further, the new loader will operate with the annual variable cost of $ 50000
whereas the older one was operating with the annual variable cost of $ 80000. Hence, it can
be said that there will be a saving in the variable cost by $ 30000. This savings in cost is
equivalent to the cash inflows for the company.
Analysis:
Old Loader
Cost of asset $ 1,00,000.00
Useful Life 4
Depreciation $ 25,000.00
Salvage Value $ 5,000.00
Annual cash outflow (1 to 4 years
each) $ 80,000.00
New Loader
Cost $ 20,000.00
Annual Cash outflow(Variable cost) $ 50,000.00

Management Accounting 2
Initial outflow:
Cost of acquisition $ 20,000.00
Less: Amount realised on sale of old
loader $ 5,000.00
Net Outflow $ -15,000.00
Less: Decrease in variable cost
($80000-$50000) $ 30,000.00
Net Savings in cost in the year of
purchase $ 15,000.00
Conclusion:
From the below calculations it can be said that the company will have a net benefit of $
15000 in the year of purchase i.e. at the end of 3rd year of old loader. Thus, it must replace the
old truck with the new one immediately without waiting for another year.

Management Accounting 3
Situation 2
Introduction
The company in the current case is considering to opt for an alternative air route for the
flights in between the station Japan and Hawaii. The existing route of the company is direct
without any stopover in between. But, now the company is intending to take a stopover at Fiji
port to attract more passengers so as to earn more revenue.
Part A
The proposal of adopting the alternative route will be evaluated in the analysis given under:
Profitability of
existing route
Profitability of
new route
Passenger
Revenue $ 2,40,000.00 $ 2,51,000.00
Cargo Revenue $ 80,000.00 $ 80,000.00
Total Revenue $ 3,20,000.00 $ 3,31,000.00
Crew Cost $ -2,000.00 $ -3,400.00
Fuel Cost $ -21,000.00 $ -26,000.00
Meals and
services $ -4,000.00 $ -4,900.00
Aircraft
Maintenance $ -1,000.00 $ -1,000.00
Additional cost $ -5,000.00 $ -40,300.00
Total cost $ -28,000.00
Net profit $ 2,92,000.00 $ 2,90,700.00
Conclusion:
Purely on the financial grounds, it is not feasible for the company to opt for the alternative
route between Japan and Hawaii as it will reduce its overall profitability by $ 1300 (292000-
290700).
Part B

Management Accounting 4
Other than the financial factors the other things that must be considered before accepting the
decision of alternative flight route for the purpose of keeping a stopover at Fiji:
 Legal factors:
It must be considered the company whether it is permissible to the crew members and flights
to enter into the concerned country or it is required to hold any licenses or permits to land at
that port.
 Environmental Factors:
The climate conditions at such route must be considered on the top most priority before
adopting any new air route as adverse atmospheric conditions can cause heavy injuries to the
flights and its passengers (Upham, Thomas, Gillingwater & Raper, 2003).
 Route Traffic:
The heavy traffic on the proposed route can cause huge delays in the flight operations which
can lead to dissatisfaction among the passengers. Therefore, the company must assess the
usual traffic condition of such routes.
 Demand and competitive forces:
The demand for the proposed route must be analysed before deciding about having any
stopover point at any particular point. Moreover, the company must also take into account the
services provided and fare charges taken by the competitor flight operating companies on the
same route.

Management Accounting 5
Situation 3
Introduction:
The Japanese tourist agency has approached to the operators of flying airlines to provide it a
charter flight at a rent of $ 160000. The flying airlines has to take into consideration various
factors before deciding whether to accept the offer from the tourist agency or to reject it. As
there would be no cargo revenue in case of acceptance of offer from the Japanese agency.
Part A
The financial analysis is undertaken below in this context.
Particulars
Usual Revenues
and costs
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
Special offer analysis:
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
Note: The allocated fixed cost is ignored as it is irrelevant in the decision making (Drury,
2006).

Management Accounting 6
The special offer from the tourist agency can give a net revenue of $ 45000 so if the company
has the spare capacity, then it must accept the offer for the chartered plane (Priemus,
Flyvbjerg & van Wee, 2008).
The other factors can also be considered for the use of spare capacity such as utilisation of
spare capacity will prevent the machine idealisation. If the spare capacity is not utilised it
may lead to machinery deterioration.
 Future anticipation of demand of passengers must also be taken into account. If there
are higher chances of increment in demand of flight seats, then the company must not
accept the offer of special offer.
 The time for which the tourist agency requires the chartered plane must also be
considered before accepting the special offer.
 The Legal requirements of the contract that is to be entered for the purpose of
providing chartered plane to the tourist agency must also be considered.
Part B
Usual Revenues
and costs
New contract
Revenues and
costs
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

Management Accounting 7
In the absence of spare capacity the airline company must not accept the special offer of
Japanese tourist agency as it would lead to loss of $ 5000.
Other factors:
 Market reputation of tourist agency: If the Japanese tourist agency has a successful
track record and has a remarkable goodwill in the market, then Airline Company can
consider to associate itself with such agency as it would increase its goodwill in the
market.
 Legal factors: The Airlines Company must consider the legality of the contract of
providing the flights to the tourist agencies for the purpose of tourism.

Management Accounting 8
References:
Drury, C., 2006. Cost and management accounting: an introduction. Cengage Learning
EMEA.
Priemus, H., Flyvbjerg, B., and van Wee, B. 2008. Decision-making on Mega-projects: Cost-
benefit Analysis, Planning and Innovation. Edward Elgar Publishing.
Upham, P., Thomas, C., Gillingwater, D. and Raper, D., 2003. Environmental capacity and
airport operations: current issues and future prospects. Journal of Air Transport
Management, 9(3), pp.145-151.