The Wall Street Journal presen

The Wall Street Journal presented data suggesting that UnitedAirlines was not covering its costs on flights from San Franciscoto Washington D.C,. The article quoted analysts saying that Unitedshould discontinue this service. The costs per flight included thecosts of fuel, pilots, attendants, food, etc. used on the flights.They also included shared costs associated with running the hubs atthe two airports, such as ticket agents, building charges, baggagehandlers, gate charges, etc. Suppose that the revenue collected onthe typical United flight from San Francisco to Washington does notcover the costs. Does this fact imply that United shoulddiscontinue these flights? What could we learn from this case ofstudy?


Hints: 1) discuss the differences between fixed costs andvariable costs and how they could affect our decision-making.

2) How would consumers react if United airlines discontinued theservice?


Let me answer the questions one by one.

1. Differencesbetween Fixed costs and Variable costs

  • Fixed costs are costs that remains same, without regarding thevolume of production whereas variable cost changes with the levelof production.
  • Fixed costs are time related whereas variable costs are volumerelated.
  • Fixed costs are required to be paid whether there is productionor not. Variable costs only occur when there is production.
  • Fixed production is considered to be a combination of fixedproduction overhead, fixed selling and distribution overhead, andfixed administration overhead. Variable cost is combination ofdirect material, direct expenses, direct labour, variable sellingand distribution overhead, variable production overhead.
  • Variable costs will remain same per unit while fixed cost perunit will change. In case of large production, per unit fixed costdecrease and vice versa.
  • Examples of fixed costs are: rent, depreciation, insurance,salary, tax etc. and examples of variable costs are: wages,material consumed, packaging expenses, commission on salesetc.

2. How wouldconsumers react if United airlines discontinued theservice?

The above situation will affect consumers very badly as it willreduce a service from San Francisco to Washington D.C. No firm ororganisation will be willing to run by incurring losses. In thecase of United Airlines, they were even unable to cover theirexpenses efficiently. In this case usually any firm will thinkabout cancelling such services. There may be regular customers ofthis airlines. They will be affected so badly.

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