Analysis Of Operating Expenses And Differential Costs For Flying Airline Company
Situation 1
|
Situation 1 |
|
|
Particulars |
Not replacing Old loader |
|
Depreciation |
$ 25,000.0 |
|
Write off |
$ 0.0 |
|
Proceeds from sale |
$ 0.0 |
|
Depreciation of new loader |
$ 0.0 |
|
Operating costs |
$ 80,000.0 |
|
Total |
$ 105,000.0 |
The above table indicates the total operating expenses of Flying Airline Company, when the organization does not replace the old loader. Moreover, the calculation directly values depreciation and operating cost that is incurred by the company promise operations. This totals the overall operating cost to $105,000, which relatively produces actual income of the organization. Bromwich and Scapens (2016) mentioned that evaluation of cost incurred in operations allows management to detect adequate opportunities, which could reduce excess expenditure conducted by the organization.
|
Situation 1 |
|
|
Particulars |
Replacing Old loader |
|
Depreciation |
$ 0.0 |
|
Write off |
$ 25,000.0 |
|
Proceeds from sale |
$ (5,000.0) |
|
Depreciation of new loader |
$ 20,000.0 |
|
Operating costs |
$ 50,000.0 |
|
Total |
$ 90,000. |
The total operating cost can be identified from the evaluation of above table when Flying Airline Company use new loader. The operating cost when using the new loader mainly declines to $90,000. The calculation of total operating cost is detected by writing of $25,000, where the position of new loader and proceed from the sale of old loader is calculated. This directly helps in identifying the overall cost incurred by the Flying Airline Company in implementing the new loader in its operations. In this context, Chiarini and Vagnoni (2015) argued that changes in operations could eventually increase expenses of the organization if adequate research or not conducted by the management before taking the decision.
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Situation 1 |
|
|
Particulars |
Differential cost |
|
Depreciation |
$ 0.0 |
|
Write off |
$ 0.0 |
|
Proceeds from sale |
$ 5,000.0 |
|
Depreciation of new loader |
$ (20,000.0) |
|
Operating costs |
$ 30,000.0 |
|
Total |
$ 15,000.0 |
Differential cost can be identified from the above table for Flying Airline Company, which would allow the management to make adequate decisions to implement the new loader or continue with old loader. The total savings on operating cost that will be conducted by the Flying Airline Company is $15,000, which helps in increasing its profitability. The differential cost directly neglects any kind of changes in depreciation and write conducted in previous calculations. Furthermore, differential cost directly states positive value for proceeds from sales of old loader, while negative value is detected for the depreciation of new loader. Lastly, the difference in operating cash is detected to be $30,000, which would allow the organization to reduce its overall cost. This differential cost could eventually help in identifying the savings that will be conducted by Flying Airline Company after implementing new loader in its operations. According to Coad, Jack and Kholeif (2015), differential analysis allows management to identify and detect measures in which expenses can be reduced in its operation. Cooper, Ezzamel and Qu (2017) further stated that selection of equipment and machinery are conducted with the help of differential cost, which allows the management to identify the benefits provided from is investment.
Hence, from the evaluation financial viability could be achieved by Flying Airline Company, if new loader is used in its operations. The company could save $15,000 from a separation in the current fiscal year if adequate changes are conducted in its loader. Furthermore, total operating expenses from next year will mainly be around $95,000, as sale from proceeds will not be recorded for the new loader. This will mainly improve the overall cost by $10,000, as compared to the current expenses conducted by flying airline company. Dekker (2016) stated that differential analysis provides in depth knowledge about the cost and the benefits that will be provided by implanting new machinery, which is essential in improving profitability of the organocation.
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Situation 2 |
|
|
Particulars |
Non-Stop Route |
|
Passenger revenue |
$ 240,000.0 |
|
Cargo revenue |
$ 80,000.0 |
|
landing fees in San Francisco |
|
|
Flight crew cost |
$ (2,000.0) |
|
Fuel |
$ (21,000.0) |
|
Meal |
$ (4,000.0) |
|
Aircraft maintenance |
$ (1,000.0) |
|
Net revenue |
$ 292,000.0 |
Situation 2
The above table indicates overall net revenue that will be provided from the nonstop route to Flying Airline Company. Total revenue provided from the nonstop route is $292,000, which is generated from the total passenger revenue and cargo revenue earned by the organization. The cost regarding flight crew, fuel, meal, and aircraft maintenance are deducted from the revenue generated by nonstop route. Evaluation of the overall cost and revenue from an operation allows organizations to take adequate decisions to increase their profitability and operational capability (Fullerton et al. 2014).
|
Situation 2 |
|
|
Particulars |
With stop route |
|
Passenger revenue |
$ 251,000.0 |
|
Cargo revenue |
$ 80,000.0 |
|
landing fees in San Francisco |
$ (5,000.0) |
|
Flight crew cost |
$ (3,400.0) |
|
Fuel |
$ (26,000.0) |
|
Meal |
$ (4,900.0) |
|
Aircraft maintenance |
$ (1,000.0) |
|
Net revenue |
$ 290,700.0 |
The table indicates the overall profits generated from one stop route, which is been proposed to Flying Airline Company. additional cost incurred by the organization due to the inclusion of one more route in its flying pattern. This additional cost is relatively declining the overall profitability of the company to $290,700 from the previous profits of $292,000. This decline in profitability is mainly due to the additional landing fees at is entered by the one stop route. Evaluation of the financial performance for operation directly allows the management to detect financial viability of the operations and whether it could provide adequate revenue. Gibassier and Schaltegger (2015) stated that evaluation of operations directly allows the management to detect cost and expenses conducted on each stage.
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Situation 2 |
|
|
Particulars |
Differential cost |
|
Passenger revenue |
$ (11,000.0) |
|
Cargo revenue |
$ – |
|
landing fees in San Francisco |
$ 5,000.0 |
|
Flight crew cost |
$ 1,400.0 |
|
Fuel |
$ 5,000.0 |
|
Meal |
$ 900.0 |
|
Aircraft maintenance |
$ – |
|
Net revenue |
$ 1,300.0 |
Differential Cost Analysis could be identified from above table, which helps in depicting financial viability of the two-situation presented to Flying Airline Company. The evaluation indicates that there will be no cargo revenue provided from the new one-stop route used by Flying Airline Company. Differential cost represents that there will be an increment in passenger revenue, cargo revenue will directly decline for the company. Furthermore, the company also incurs landing fees and other flight cost, which increases expenses from operations. However, the evaluation of differential cost in the kids or net loss of $1,300 if the new one stop route is used by flying airline company. This relevant decline in profitability could eventually hamper future cash availability of the organization, while declining its current net revenue stream. Therefore, it is estimated that decline of the current one stop route proposed to flying airline company could eventually help in improving its revenue in long term. this could eventually support the organization on financial base, which could intern improve its cash reserve. Hopper and Bui (2016) stated that identification of different cost incurred from in operation allows management to understand the relevant profitability, which could be obtained from the decision.
Situation 3
From the valuation of situation 2, other factors that needs to be discussed before making the decision of one stop route. There is fairly two different factors that is to be understood by the flying airline company before making the relevant decisions. The first factor is the increment in operations from one stop flight route. This increment in the overall operations could eventually lead to higher revenue generation in near future. This could eventually help Flying Airline Company to improve its operation and conduct additional flight routes. The second factor that needs to be addressed by Flying Airline Company is the economy in which operation needs to be conducted. Economic evaluation could help in detecting purchasing power of customers and understand that the citizens could adopt increased prices (Kotas 2014). This would eventually allow the flying a line company to improve its operations and generate higher revenue in future.
|
Situation 3 |
|
|
Particulars |
Value |
|
Passenger revenue |
$ 250,000.00 |
|
Cargo revenue |
$ 30,000.00 |
|
Total revenue |
$ 280,000.00 |
|
Variable expenses |
$ 90,000.00 |
|
Fixed cost |
$ 80,000.00 |
|
Total expenses |
$ 170,000.00 |
|
Profit |
$ 110,000.00 |
The table directly indicates overall revenue, which could be generated from the flight conducted by Flying Airline Company. This revenue detected in the above table is mainly obtained during normal circumstances, where in the company is conducting both cargo and passenger operations. This evaluation could eventually help the management to understand the significance of special tourist charter flight plan that is proposed to flying a line company. Lavia, and Hiebl (2014) mentioned that management with the help of cost evaluation can identify revenue opportunities, which could increase total income of the organization.
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Situation 3 |
|
|
Particulars |
Value |
|
Passenger revenue |
$ 160,000.00 |
|
Cargo revenue |
$ – |
|
Total revenue |
$ 160,000.00 |
|
Variable expenses |
$ 85,000.00 |
|
Fixed cost |
$ – |
|
Total expenses |
$ 85,000.00 |
|
Profit |
$ 75,000.00 |
The evaluation of situation 3 indicates and investment opportunity for Flying Airline Company to increase the revenue without incurring extra expenses. The situation indicates that no extra space charges needs to be conducted by the Flying Airline Company for complying with the new special tourist charter flight. Adequate calculations are conducted in the above table, which helps in identifying the profitability of $75,000 from operations if Flying Airline Company chooses to comply with the special tourist charter flight. However, the actual revenue that is generated from the operations is 110,000 which in this case is not achievable by the company due to contractual obligations. The evaluation indicates that profitability from the operations could be conducted if the organization accepts new charter tourist flight proposal. The profits of $75,000 will be achieved by the company, which might in turn help in increasing its total revenue and profitability. In this context, Messner et al. (2016) stated that with the help of revenue and cost evaluation organizations can detect actual profits, which could be obtained from their operations.
Moreover, after accepting the proposal of new charter tourist flight the company would lose revenue from cargo, which is an essential income source and had helps in increasing profitability. However, the proposal could eventually help in strengthening the bond between tourist company and flying a line company, which could help in building long term professional relationship. Furthermore, the proposal is mainly accepted only if there is space available to the flying airline company who can accommodate a charter plane and does not have to increase its fixed cost. This decline in fixed cost has mainly allowed the company to compensate for the additional income generated from cargo revenue (Otley 2016).
|
Particulars |
Value |
|
Passenger revenue |
$ 160,000.00 |
|
Total revenue |
$ 160,000.00 |
|
Variable expenses |
$ 85,000.00 |
|
Fixed cost |
$ 80,000.00 |
|
Total expenses |
$ 165,000.00 |
|
Loss |
$ (5,000.00) |
The calculations conducted in the above table directly indicates the overall loss, which will incur by the company if no space is available for the charter plane. The additional cost incurred for the maintenance of charter plane would nullify all the profits from the proposal. This could eventually lead to a loss of $5,000, which might hamper financial position of Flying Airline Company. Therefore, from the valuation it could be understood that if the company does not have any extra space for the charter plane the overall proposal needs to be rejected by the management. Renz (2016) stated that cost evaluation allows the management to identify viability of any project, which could in turn help in supporting its revenue generation capacity. Thus, it is advisable to Flying Airline Company that if there is no extra space then rejecting the proposal is most viable option.
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