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Global Air 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 Global Air 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: i (Click the icon to view additional (Click the icon to view the pricing and ticket information.) information.)
$ Price Charged 800 $ 2,200 Variable Cost per Ticket 85 175 Number of Seats Expected to Be Sold Business Pleasure 150 75 135 45
Pleasure travelers start their travel during one week, spend at least 1 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 $24,400 and that fixed costs allocated to the round-trip flight for airplane-lease costs, ground services, and flight-crew salaries total $188,000.
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 Global Air 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?
Requirement 1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations. Before determining if you would charge different prices to business travelers and pleasure travelers, calculate the total contribution margin at each price for each type of traveler. Total contribution margin Price charged Business Pleasure 53,625 $ 800 $ 107,250 $ 273,375 2,200 91,125 Global Air would maximize contribution margin and operating income by charging business travelers a fare of $2,200 and pleasure travelers a fare of $2,200. Global Air would maximize contribution margin and operating income by setting prices at the highest level for any customer, where business travelers are charged the same as pleasure travelers.
Requirement 2. Explain the key factor (or factors) for your answer in requirement 1. 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. Pleasure travelers are price sensitive because they have to pay for their own airfare. (Round the percentages to the nearest tenth percent, X.X%.) % of the business passengers from flying An increase in fares from $800 to $2,200 will deter only with Global Air. In contrast, a similar fare increase will lead to a(n) % drop in pleasure travelers. The drop in demand for the pleasure travelers offset by the total contribution margin.