Case study: company profile

Airline company 'Fly Hamster Fly' transports both passengers and cargo. Below you find the cost categories and costs for the year 2012

The depreciation and personnel costs are fixed costs. The operating costs consist of fixed costs and variable costs. They concern various costs like costs involved in taking care of the flights, daily airplane maintenance costs, fly over and landing rights, and fuel usage. Fly Hamster Fly has given the following overview (years 2003-2011) of the operating costs. These costs are partly related to the company's turnover (revenues).

At a turnover of € 40.000.000, the maximum loadfactor (100%) of the planes is reached.

The above costs and turnover levels concern the transfer of both passengers and cargo. The total fixed operating costs and variable operating costs can be estimated using the high-low method

Question A

Calculate the 'variable operating costs' and 'fixed operating costs', using the high-low method. The variable operating costs have to be expressed as a percentage of the turnover.

Question B

State an advantage of using the high-low method. State a disadvantage of using the high-low method.

It is important for Fly Hamster Fly to know at which loadfactor the costs are fully covered. This is the break-even loadfactor, which can be expressed as a percentage:

Loadfactor =(budgeted turnover level / maximum turnoverlevel)*100%

Question C

Calculate the break-even turnover and the break-even loadfactor.

For the year 2012, Fly Hamster Fly expects a loadfactor of 80%.

Question D

Why do Airline companies generally have a high operating leverage? (Mention 1 reason.) How can Airline companies lower their operating leverage? (Mention 1 example.)

Question E

Calculate the budgeted net profit account of 2012. Thereby, provide an income statement according the contribution margin format.

Question F

Calculate the operating leverage at a loadfactor of 80%. Thereby, calculate the safety margin at a 80% loadfactor. (the safety margin should be expressed as a percentage)

As this is a different book year, the fixed costs will not be the same as those you calculated earlier.

To calculate a flight's cost price, Fly Hamster Fly currently applies a mark-up method.

This means that the direct costs are increased by an additional amount to cover the indirect costs. This additional amount is 12.5% of the direct costs assigned to a flight.

The indirect costs are exclusively determined by the number of control tasks. These control tasks can be considered as a 'cost driver'. Based on the budget, Fly Hamster Fly expects it will have to execute 24,000 control tasks.

In the book year 2013, Fly Hamster Fly expects to make 2,000 flights. This budgeted amount of flights is categorized as follows:

Fly Hamster Fly may choose to replace the relatively simple and traditional mark-up method by the more advanced (and expensive) cost price system of Activity Based Costing.

Question G

Calculate the cost price of a passenger flight and the cost price of a cargo flight according to the abc-method.

Question H

Calculate the cost price of a passenger flight and the costprice of a cargo flight according to the mark-up method.

Anwers

Answer A

Answer B

adv the method is very easy to use

disadv the points you use might be outliers

the points between the highest and lowest

points are not used

Answer C

total fixed costs 19.900.000

variable costs 0,36*turnover

0,64*turnover = 19,900,000
turnover = 19,900,000/0,64
BE-turnover
€ 31.093.750,00
break-even-loadfactor 77,73%

Answer D

Why high OPL?

the relative size of the fixed costs is high competitive market

How lower OL?

tranfer fixed costs >> variable costs

lease the airplanes, flexible labor contracts

Answer E

Answer F

Answer G

Answer H

Answer I

Pro ABC

When the traditional method is used the real costs of the cargo transport is understated. The difference is cost allocation is € 1.261.888,89 30,37% The costprice of a cargo transport should be € 3.154,72 higher. Based on this result is likely that cargo transport is not profitable. ABC leads to better (strategic) decisions

Contra ABC

The ABC method is an expensive method. The costprice will therefore be higher. Because of the relatively high percentage of direct costs (90%) it is doubtful whether this advanced method ultimately leads to better decisions. The costprice of the passenger flight changes only 4,34% The costs of the introduction of the abc method are not included