Management Accounting Case Study: Situational Analysis for Airlines

This case study explores the decision-making process for Flying Airlines regarding a special chartered flight offer from a Japanese Tourist Agency. The assignment analyzes the profitability of the offer under two scenarios: when spare capacity is available and when it is not. The financial analysis includes revenue, variable costs, and lost cargo revenue, leading to conclusions about whether to accept the offer based on financial grounds. The study emphasizes the importance of considering non-financial factors like the tourist agency's reputation and competitor pricing. When there is no spare capacity, the analysis shows a potential loss, leading to a recommendation against accepting the offer. The assignment also highlights additional factors to consider, such as the flight duration, impact on existing operations, and seasonality of the tourism industry. The analysis utilizes concepts from management accounting and cost accounting to guide decision-making.

Running Head: Situational Analysis in Decision Making
Management Accounting

Situational Analysis in Decision Making 1
Situation 3
Introduction
Flying Airlines has been approached by the Japanese Tourist Agency for obtaining the
special chartered flight for the tourism purpose. To accept the offer, the company will have to
evaluate the profitability of this special offer. Apart from the financial results of the offer,
other factors may also be considered by the company. The tourist agency is ready to pay $
160000 for the chartered file to the Flying Company. But, in that case the company will not
have any cargo revenue. However, the variable costs will be reduced by $5000.
In case where there is space capacity available with the company following analysis can be
undertaken on financial ground:
Offer price
(Revenue)
$
1,60,000.00
Less
Revised Variable
cost
$
85,000.00
$
75,000.00
Less Lost cargo revenue
$
30,000.00
Net benefit from
special offer
$
45,000.00
Note: The allocated fixed cost is irrelevant in the decision making as it will be incurred in
either cases whether the spare capacity is utilised or not (Zimmerman & Yahya-Zadeh, 2011).

Situational Analysis in Decision Making 2
Conclusion: On the basis of above calculation it can be observed that even if there is a loss of
revenue the flying airlines company will be benefited. There will be a profit of $45000 if the
spare capacity will be used. Therefore, on the financial ground it is reasonable to accept the
special offer of tourist agency.
However, this decision must not be only based on the financial factors. Rather, other factors
must also be considered in this type of decision making such as:
The goodwill of the tourist agency and its history will have to be accessed before entering
into any contract with it for the provision of chartered flight. Since if the agency is not
reliable, it may cause heavy damage to the business of flying airlines. Also, if the tourist
agency has sound goodwill in the market, it can promote the reputation of flying airlines in
the market. Also, the competitor’s prices in the similar transactions must also be considered.
It shall also be taken into account that whether it is legally permissible for the flying airlines
to enter into contracts (Priemus, Flyvbjerg & van Wee, 2008).
Part B
When there is no spare capacity available with the company, it will have to compromise with
its existing demand in the market to fulfil the special offer of tourist agency (Horngren, 2009).
The analysis will be undertaken in the following way:
Profitability in
existing
operations
Profitability
under special
offer
Passenger Revenue $ 2,50,000.00 $ 1,60,000.00
Cargo Revenue
$
30,000.00 $ -
Total Revenue (a) $ 2,80,000.00 $ 1,60,000.00

Situational Analysis in Decision Making 3
Variable cost of the flight
$
90,000.00 $ 85,000.00
Fixed costs allocated
$
80,000.00 $ 80,000.00
Total Expenses (b) $ 1,70,000.00 $ 1,65,000.00
Profit (a-b) $ 1,10,000.00 $ -5,000.00
Conclusion:
The company must not accept the offer of tourist agency of chartering the special flight
between Japan and Hawaii as it will not result in increased profitability of the company.
Rather, the company will have to incur a loss of $ 5000.
Other factors that needs to be considered in case of decision making about acceptance or
rejection of special offer of tourist agency.
The time for which the flight will be given by the company to the tourism agency for the
hiring purposes of chartered plane.
The extent of disturbance in the existing operations of company if such flight is unavailable
and the number of other flights available and their capacity.
The seasonality of the tourism industry for the period for which the flight will be hired out to
the tourism agency.

Situational Analysis in Decision Making 4
References:
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Priemus, H., Flyvbjerg, B., and van Wee, B. 2008. Decision-making on Mega-projects: Cost-
benefit Analysis, Planning and Innovation. Edward Elgar Publishing.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control. Issues in
Accounting Education, 26(1), pp.258-259.