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PROBLEM 4-5. Break-Even, “What If” [LO 3] Michael Bordellet is the owner/pilot of Bordellet Air Service. The company flies a daily round trip from Seattle’s Lake Union to a resort in Canada. In 2010, the company reported an annual income before taxes of \$8,084 although that included a deduction of \$70,000 reflecting Michael’s “salary.”

Revenue (\$360 Af— 1,248 passengers)

\$449,280

Less costs:

Pilot (owner’s salary)

\$ 70,000

Fuel (35,657 gallons Af— \$4.15)

147,977

Maintenance (variable)

127,920

Depreciation of plane

25,000

Depreciation of office equipment

2,800

Rent expense

40,000

Insurance

20,000

Miscellaneous (fixed)

7,500

= 441,197

Income before taxes

\$ 8,083

Revenue of \$449,280 reflects six round trips per week for 52 weeks with an average of four passengers paying \$360 each per round trip (6 Af— 52 Af— 4 Af— \$360 = \$449,280). The flight to the resort is 400 miles one way. With 312 round trips (6 per week Af— 52 weeks), that amounts to 249,600 miles. The plane averages 7 miles per gallon.

Required (Round all monetary calculations to the nearest cent and all trips to the nearest whole trip.)

a.How many round trips is Michael currently flying, and how many round trips are needed to break even?

b.How many round trips are needed so that Michael can draw a salary of \$110,000 and still not show a loss?

c.What is the average before-tax profit of a round trip flight in 2010?

d.What is the incremental profit associated with adding a round-trip flight?