Management Accounting Report: Financial Analysis of Airline Scenarios

This report analyzes three financial scenarios faced by an airline company using management accounting principles. The first situation evaluates the decision to replace a loader truck with a conveyor belt, considering cash flows both with and without a depreciation tax shield. The second scenario examines the profitability of non-stop versus stop-over flights, highlighting the impact of various costs on overall profit. The third situation addresses the acceptance of a special tourist charter offer, considering both financial and non-financial factors, such as spare capacity and potential impacts on existing customers. The report emphasizes the importance of comprehensive financial analysis, including the consideration of both quantitative and qualitative aspects, for effective decision-making in the airline industry, referencing factors such as industry standards, customer satisfaction, and potential risks.

MANAGEMENT ACCOUNTING

Situation 1.
The flying airlines company has two options- either it can replace the loader truck with the
conveyor belt now or it can wait for an year to replace the same.
The airlines can take the decision based on two things. The first option is to look on the cash
flows of the company ignoring the depreciation tax shield and the other is to take a decision
keeping in mind the depreciation tax shield. (Chandra, 2014)
Option 1: Cash flows in both the cases ignoring the depreciation tax shield
If the Airlines company takes the decision to replace the loader now then it will have a net
cash outflow of $75000. As we know that the total cash outflow ( annual variable operating
cost) will be $80000 whereas the cash inflow i.e. the amount received on selling the loader is
$5000. So, we can conclude that the net cash outflow if the company takes the decision of
replacing the loader by conveyor belt now will be $75000.
In the second case, the operations manager is thinking of replacing the loader next year. His
decision will be finalised only after comparing it with the other option. So, he calculates the
total cash outslow for this situation as well. The total amount of money spent will include the
cost of purchasing the conveyor belt i.e., $20000 along with the annual variable operating
cost i.e., $50000. Therefore, total cash outflow will be $70000.
The airline company should buy the conveyor belt now itself rather than to wait for one more
year because this will help them to save $(75000-70000) = $ 5000 this year.
Option 2 : Cash flows assuming that there is a depreciation tax shield
We all know that depreciation is a non cash item that is reflected as an expense in the profit
and loss account. However, depreciation also provides as a tax shield. We consider money
saved to be money earned and so it will affect the cash flows of the company. Let us see the
impact of this tax shield on both the situations. (Shah, 2009)
In the first situation, the annual depreciation is $25000. Assuming the tax rate to be 30%, we
can say that the tax saving is $25000*30*= $7500. Therefore, the net cash flow in the first
situation is $(80000-5000-7500) =$ 67500.
In the second situation, tax saved = $(20000*30%) =$6000. Therefore the total cash outflow
of the Airlines company would be $(20000+50000-6000) = $64000.
Therefore, the cash outflow is less when the company chooses to purchase a new conveyor
belt without waiting for one year based on both the options.

Situation 2.
On the basis of financial grounds, the Airlines company should continue with the non stop
flight as it provides more profit than the alternative. The calculation of profits under both the
circumstances are shown in the below table:
PARTICULARS
NON STOP
FLIGHT
STOP IN FIGI
FLIGHT
Passenger Revenue 240000 251000
Cargo revenue 80000 80000
Total Revenue (A) 320000 331000
Flight crew cost 2000 3400
Fuel 21000 26000
Meals and services 4000 4900
Aircraft
Maintenance 1000 1000
Additional charges 5000
Total cost (B) 28000 40300
Total Profit (A-B) 292000 290700
Although the passenger revenue is more in case of a stop flight but still it is unable to
generate as much profit as non- stop flight. The reason for this might be the increase in flight
crew cost, fuel expenses, meals and services and also an additional charge of landing. The
increase of expenses is exceeding the increase of the revenues. (Bhattacharyya, 2011)
The company is able to earn a profit of $292000 if it continues with the alternative of non-
stop flight from Sydney to Hawaii whereas if it thinks of stopping at Figi then it would be
able to earn profit of $290700 only. Therefore, we can conclude that the company should
continue with its current idea of non- stop flights. (Epstein and Lee, 2012)
The above answer is based on the financial ground but there are also certain non financial
grounds that the company has to look upon before taking any kind of decision in a company.
The company should also look upon the following factors-

The company has to analyse whether it will be able to match the industry standards if it
rejects or accepts a particular project and then work accordingly.
A company cannot survive in the long run by earning profits only so it should also look upon
the customer’s needs and sometimes take decision based on their satisfaction. (Hart, Wilson
and Fergus, 2012)
There is also a requirement of improving reputation of the business and relationships in the
community.
It also has to see whether there is an availability of suitable manpower and technology to take
up a certain project.
The company should identify all the strengths, weakness, opportunities and threats relating to
the project before taking any final decision. We can also say that it must carry out SWOT
analysis.
The company should keep a watch on the environmental constraints. It is better to reject such
projects whose outcome will harm them more than it will benefit them.

Situation 3
(A) Spare capacity means operating below the maximum sustainable capacity. In this case, if
there is a spare capacity in the airlines then the special tourist charter offer should be accepted
on financial grounds. This can be proved by the following calculations. (Atrill and McLaney,
2009)
PARTICULARS
SPECIAL
OFFER
Passenger
Revenue 250000
Charter income 160000
Cargo Revenue 0
Total revenue(A) 410000
Variable
expenses 85000
Fixed cost 80000
Total
expenses(B) 165000
Total profit(A-B) 245000
The profit earned usually was $110000 but on acceptance of the special offer the company is
able to earn an extra profit of $(245000-110000) = $135000. (Libby, Libby and Hodge, 2017)
A company cannot take its decision based on the financial ground only. It also has to see
whether it is acceptable on the non financial grounds or not. The other factors that the
company should look at are-
It should check whether acceptance of this offer would affect the goodwill of the company in
a better way or not.

It should always keep in mind that the acceptance of this offer does not affect the existing
customers as it can be harmful in the long run.
It should check the future prospects of accepting this order.
It should not happen that the acceptance of such offer provides short term benefits to the
company but proves to be harmful later on. So, the company should also analyse the
opportunity cost before taking a final decision.
In the case of no spare capacity, the company can either continue with the usual flights or it
can accept the special offer. Therefore, a comparative analysis has to be carried out in order
to know which option would help to generate higher profits. (Piper, 2015)
If the company keeps on carrying out its usual business then it would earn profits of $110000
(as per the table below). But if the company accepts the special offer then it will be able to
earn $160000. So, it should accept the offer on the basis of financial grounds.
PARTICULARS
USUA
L
Passenger
Revenue 250000
Cargo Revenue 30000
Total revenue(A) 280000
Variable
expenses 90000
Fixed cost 80000
Total
expenses(B) 170000
Total profit(A-B) 110000
However, this comparative analysis is not enough for the company to take a decision. The
following factors should also be considered:
There may be a lower demand for a short period due to seasonal variation but the company
should not take the decision based on this period because it may harm the company in the
future.
Acceptance of such offers should always take into consideration the satisfaction of the
customers, employees and the workers.

It should look upon the other competitors and see if this act would match up with the industry
standards. It is very important to compete well to generate higher revenue.
Acceptance of such offer should have an adverse impact on the company’s reputation.
There are chances that the company may lose its valuable customers just because of short
term profits. This should not happen and therefore, the term of the offer should be properly
analysed.

REFERENCES:
Atrill, P. and McLaney, E. (2009). Management accounting for decision makers. Harlow:
Financial Times/Prentice Hall.
Bhattacharyya, D. (2011). Management accounting. Noida, India: Pearson.
Chandra, P. (2014). Fundamentals of financial management. New Delhi: Tata McGraw-Hill
Education.
Epstein, M. and Lee, J. (2012). Advances in management accounting. Bingley: Emerald.
Hart, J., Wilson, C. and Fergus, C. (2012). Management accounting. Frenchs Forest, N.S.W.:
Pearson Australia.
Libby, R., Libby, P. and Hodge, F. (2017). Financial accounting. New York, NY: McGraw-
Hill Education.
Piper, M. (2015). Accounting made simple. [United States]: [CreateSpace Pub.].
Shah, P. (2009). Management accounting. New Delhi: Oxford University Press.