Author Question: Failure to record the entry for accrued wages results in a. wages payable being overstated. b. net ... (Read 56 times)

tiara099 · **on:** Jul 6, 2018

Failure to record the entry for accrued wages results in
a. wages payable being overstated.
b. net income being understated.
c. wages expense being understated.
d. total assets being understated.
e. total assets being overstated.

Question 2

Airline pricing, considerations other than cost in pricing.

Northern Airways is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round- trip tickets.
The market research group at Northern Airways segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents:

Pleasure travelers start their travel during one week, spend at least one weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends.
Assume that round-trip fuel costs are fixed costs of 24,700 and that fixed costs allocated to the round-trip flight for airplane-lease costs, ground services, and flight-crew salaries total 183,000.

Required:
1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations.
2. Explain the key factor (or factors) for your answer in requirement 1.
3. How might Northern Airways implement price discrimination? That is, what plan could the airline formulate so that business travelers and pleasure travelers each pay the price the airline desires?

Joy Chen · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

C

Answer to Question 2

1. If the fare is 800,
a. Northern Airways would expect to have 300 business and 150 pleasure travelers.
b. Variable costs per passenger would be 85.
c. Contribution margin per passenger = 800 85 = 715.
If the fare is 1,800,
a. Northern Airways would expect to have 285 business and 30 pleasure travelers.
b. Variable costs per passenger would be 195.
c. Contribution margin per passenger = 1,800 195 = 1,605.

Contribution margin from business travelers at prices of 800 and 1,800, respectively, follow:
At a price of 800: 715 300 passengers = 214,500
At a price of 1,800: 1,605 285 passengers = 457,425
Northern Airways would maximize contribution margin and operating income by charging business travelers a fare of 1,800.

Contribution margin from pleasure travelers at prices of 800 and 1,800, respectively, follow:
At a price of 800: 715 150 passengers = 107,250
At a price of 1,800: 1,605 30 passengers = 48,150
Northern Airways would maximize contribution margin and operating income by charging pleasure travelers a fare of 800.
Northern Airways would maximize contribution margin and operating income by a price differentiation strategy, where business travelers are charged 1,800 and pleasure travelers 800.
In deciding between the alternative prices, all other costs such as fuel costs, allocated annual lease costs, allocated ground services costs, and allocated flight crew salaries are irrelevant. Why? Because these costs will not change whatever price Northern Airways chooses to charge.

2. The elasticity of demand of the two classes of passengers drives the different demands of the travelers. Business travelers are relatively price insensitive because they must get to their destination during the week (exclusive of weekends) and their fares are paid by their companies. A 225 increase in fares from 800 to 1,800 will deter only 5 of the business passengers from flying with Northern Airways.
In contrast, a similar fare increase will lead to an 80 drop in pleasure travelers who are paying for their own travels, unlike business travelers, and who may have alternative vacation plans they could pursue instead.

3. Because business travelers often want to return within the same week, while pleasure travelers often stay over weekends, a requirement that a Saturday night stay is needed to qualify for the 800 discount fare would discriminate between the passenger categories. This price discrimination is legal because airlines are service companies rather than manufacturing companies and because these practices do not, nor are they intended to, destroy competition.