Question

MidCoast Airlines provides charter airplane services. In October of this year, the company is operating at 60% of its capacity when it receives a bid from the local community college. The college is organizing a Washington, D.C., trip for its international student group. The college budgeted only \(30,000 for roundtrip airfare. MidCoast Airlines normally charges between \)50,000 and \(60,000 for such service. MidCoast determines its cost for the round-trip flight to Washington to be \)44,000, which consists of the following:

Variable cost	\(15,000
Fixed cost (allocated)	29,000
Total cost	\)44,000

Although the manager at MidCoast supports the college’s educational efforts, she cannot justify accepting the \(30,000 bid for the trip given the projected \)14,000 loss. Still, she decides to consult with you, an independent financial consultant. Do you believe the airline should accept the bid from the college? Prepare a memorandum, with supporting computations, explaining why or why not.

Short answer

Thecollege’s bid should be accepted by the MidCoast Airlines.

Step-by-step solution

Meaning of Revenue

In accounting, the term revenue refers to the amount of income generated by a business entity from thesale of goods or services.The major source of revenue varies from business to business according to its core operations and is computed through the income statement.

Computation for making decision

Contribution Margin Analysis
Particulars	Amounts ($)
Revenues from college	30,000
Less: Variable cost	(15,000)
Contribution margin	$15,000

Comment:

The airline company should accept the bid from the college because it will increase the income by $15,000 and the Airline Company is not required to incur additional fixed expenses.