The following statement was made by Dr Julipa, CEO of Air Sahara in Air Sahara’s Annual Report for 2020. ‘In the year un
Posted: Mon Apr 25, 2022 7:35 am
The following statement was made by Dr Julipa, CEO of Air Sahara
in Air Sahara’s Annual Report for 2020.
‘In the year under review we realized sizable cost reductions
across the organization, including successfully negotiating
burdensome contracts with suppliers, thereby, locking around P2
million in savings annually. This saving culture will continue over
the next five years. In recognition of this, Air Sahara has opened
a savings account with ABSA Botswana where it will deposit the P2
million. These cost cuts should be given further boost in years
ahead by developing synergies with global airlines. The company has
identified Blue Airlines as a possible alliance.
Although our earnings for year were not as high as we would have
liked, solid progress was made in our efforts to assure long-term
sustainability and profitability within Air Sahara. The greatest
threat has been the COVID19 pandemic which destabilized air travel.
Furthermore, increasing completion and the industry, and high
aircraft maintenance and replacement costs have emerged as barriers
of expansion in the sector. In preparation for joining Blue
Alliance, we at Sahara Alliance have established better, more
efficient ways of running our business and pleasing our
customers’.
In response to these remarks the CEO of Blue alliance requested
that key operational data should be sourced from the company. The
following information was provided:
Financial Data and key data for Air Sahara [2019]
Pula
Pula
Sales: [1 100 tickets at P12 000 per ticket]
13 200 000
Less: Cost of Goods Sold.
Variable Production Costs [1 100 units]
5 500
000
Contribution Margin
7 700
000
Selling and Administrative Expenses
Fixed Production Costs
3 000 000
Fixed Selling Expenses
2 500 000 5 500
000
Net Income
2 200 000
Bank savings for the year will be around P2 million, with P200 000
being reinjected into the company
Required:
[a] Give examples of two costs that Air Sahara may regard as being
variable costs, and two costs that will be regarded as fixed costs
in airline services. For each cost explain why the cost falls into
the stipulated classification.
[4]
Determine the Break-Even Point [BEP] and the Margin of Safety
[MoS] of Air Sahara operations. Comment on the BEP and MoS of the
company in 2020.
[4]
[c] Discuss two [2] ways in which Air Sahara could use
cost-volume-profit [CVP] analysis in assessing their performance,
and/or in decision making.
[4]
[d] Comment on the savings culture proposed by Air Sahara, and its
likely impact on future operations of the company. Is this culture
likely result in the ‘long-term sustainability and profitability’
mentioned by the CEO of the company? Explain.
[4]
[e] What is the current cost structure of Air Sahara? With reasons,
comment on its appropriateness.
[3]
in Air Sahara’s Annual Report for 2020.
‘In the year under review we realized sizable cost reductions
across the organization, including successfully negotiating
burdensome contracts with suppliers, thereby, locking around P2
million in savings annually. This saving culture will continue over
the next five years. In recognition of this, Air Sahara has opened
a savings account with ABSA Botswana where it will deposit the P2
million. These cost cuts should be given further boost in years
ahead by developing synergies with global airlines. The company has
identified Blue Airlines as a possible alliance.
Although our earnings for year were not as high as we would have
liked, solid progress was made in our efforts to assure long-term
sustainability and profitability within Air Sahara. The greatest
threat has been the COVID19 pandemic which destabilized air travel.
Furthermore, increasing completion and the industry, and high
aircraft maintenance and replacement costs have emerged as barriers
of expansion in the sector. In preparation for joining Blue
Alliance, we at Sahara Alliance have established better, more
efficient ways of running our business and pleasing our
customers’.
In response to these remarks the CEO of Blue alliance requested
that key operational data should be sourced from the company. The
following information was provided:
Financial Data and key data for Air Sahara [2019]
Pula
Pula
Sales: [1 100 tickets at P12 000 per ticket]
13 200 000
Less: Cost of Goods Sold.
Variable Production Costs [1 100 units]
5 500
000
Contribution Margin
7 700
000
Selling and Administrative Expenses
Fixed Production Costs
3 000 000
Fixed Selling Expenses
2 500 000 5 500
000
Net Income
2 200 000
Bank savings for the year will be around P2 million, with P200 000
being reinjected into the company
Required:
[a] Give examples of two costs that Air Sahara may regard as being
variable costs, and two costs that will be regarded as fixed costs
in airline services. For each cost explain why the cost falls into
the stipulated classification.
[4]
Determine the Break-Even Point [BEP] and the Margin of Safety
[MoS] of Air Sahara operations. Comment on the BEP and MoS of the
company in 2020.
[4]
[c] Discuss two [2] ways in which Air Sahara could use
cost-volume-profit [CVP] analysis in assessing their performance,
and/or in decision making.
[4]
[d] Comment on the savings culture proposed by Air Sahara, and its
likely impact on future operations of the company. Is this culture
likely result in the ‘long-term sustainability and profitability’
mentioned by the CEO of the company? Explain.
[4]
[e] What is the current cost structure of Air Sahara? With reasons,
comment on its appropriateness.
[3]