A travel agency offers Worldwide Flight Ltd. £150,000 for a round-trip flight service from Singapore to Beijing on a jumbo jet. Worldwide Flight usually receives £250,000 in revenue from this route. The company has two aircrafts that are idle and could be used to fly on the proposed Singapore to Beijing route. The company has no plan to add any other new routes. Worldwide Flight will save £5,000 in reservation and ticketing expenses if the offer is accepted. The following relates to the revenue and cost information of a typical flight service on the proposed route: Typical Flight Service Between Singapore and Beijing Revenue: £ 250,000 Passenger Cargo Total 30,000 £ 280,000 Expenses: Variable expenses Allocated fixed expenses Total Profit 90,000 100,000 190,000 £ 90,000 Required: a) Should Worldwide Flight accept the offer? Explain your answer. b) Suppose that if Worldwide Flight adds the route, it will have to cut its least profitable route that currently makes a contribution margin of £70,000, because the two idle airplanes are not technically suitable for the route. Should Worldwide still accept the offer? Explain your answer. c) Define opportunity cost and name one example of opportunity cost in the above question.
A travel agency offers Worldwide Flight Ltd. £150,000 for a round-trip flight service from Singapore to Beijing on a jumbo jet. Worldwide Flight usually receives £250,000 in revenue from this route. The company has two aircrafts that are idle and could be used to fly on the proposed Singapore to Beijing route. The company has no plan to add any other new routes. Worldwide Flight will save £5,000 in reservation and ticketing expenses if the offer is accepted. The following relates to the revenue and cost information of a typical flight service on the proposed route: Typical Flight Service Between Singapore and Beijing Revenue: £ 250,000 Passenger Cargo Total 30,000 £ 280,000 Expenses: Variable expenses Allocated fixed expenses Total Profit 90,000 100,000 190,000 £ 90,000 Required: a) Should Worldwide Flight accept the offer? Explain your answer. b) Suppose that if Worldwide Flight adds the route, it will have to cut its least profitable route that currently makes a contribution margin of £70,000, because the two idle airplanes are not technically suitable for the route. Should Worldwide still accept the offer? Explain your answer. c) Define opportunity cost and name one example of opportunity cost in the above question.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:A travel agency offers Worldwide Flight Ltd. £150,000 for a round-trip flight service from Singapore to Beijing on a
jumbo jet. Worldwide Flight usually receives £250,000 in revenue from this route. The company has two aircrafts
that are idle and could be used to fly on the proposed Singapore to Beijing route. The company has no plan to add
any other new routes. Worldwide Flight will save £5,000 in reservation and ticketing expenses if the offer is
accepted. The following relates to the revenue and cost information of a typical flight service on the proposed route:
Typical Flight Service Between Singapore and Beijing
Revenue:
£ 250,000
Passenger
Cargo
30,000
Total
£ 280,000
Expenses:
Variable expenses
Allocated fixed expenses
90,000
100,000
190,000
90,000
Total
Profit
Required:
a) Should Worldwide Flight accept the offer? Explain your answer.
b) Suppose
makes a contribution margin of £70,000, because the two idle airplanes are not technically suitable for the
route. Should Worldwide still accept the offer? Explain your answer.
if Worldwide Flight adds the route, it will have to cut its least profitable route that currently
c) Define opportunity cost and name one example of opportunity cost in the above question.
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