MBAA 517 ASSIGNMENTS CONTINUATION

MBAA 517

4.2

CLASSMATE POSTS:

NOMTHANDAZO,

The fixed costs of a firm are costs that will be independent of the companies output. In the case of the Emirates group, these will include rent, insurance, buildings such as the Emirates campus, machinery, equipment, maintenance overhaul and inspection, and some other costs.

Some of Emirates’ variable costs that will vary with output include wages, oil, landing fees, catering, crew expenses, crew salaries per hour, utilities, materials, some maintenance costs, and of course the all-time critical component-fuel costs.

Variable costs definitely get the priority in Emirates’ management’s decisions to distribute funds. With fuel, which covers 39 % of Emirates’ cost base, along with other variable cost fluctuations accounting for most of the airlines expenditure, variable costs get the most attention. Secondly, management can have a bit more leverage in controlling variable costs as opposed to fixed costs. As Emirates CEO Tim Clark has indicated in several statements, most of the gambles that the airlines takes come from deciding on factors that will increase the airlines variable costs, such as the purchase of a number of new A380s.

Emirates has one of the youngest fleets in the world, with the average age of aircraft pegged at 6.4 years. Whereas the average for most other major airlines is over 13 years. This variable cost is a priority for Emirates because newer aircraft like the A380s and the 777s burn less fuel and have engines that are 30-40% more efficient than aircraft from 15 years ago. “The A380 burns up to 20% less fuel per seat than its nearest competitor, in part because it uses a range of lightweight materials that account for about one-fourth of its structure. The A380 has proved to be fuel efficient when considering fuel burn per passenger.” (D’Cruz, 2014)

• Newer, fuel-efficient aircraft means less is spent on fuel.
• Lower maintenance costs since the fleet is young.
• Lower labor costs because Dubai has no income taxes and attracts workers from other countries where wages are generally low.
• Wide-bodied aircraft means more seats available to generate revenue.
• Long-range aircraft means more miles flown per passenger. The cost of producing a seat-mile falls as average sector length increases since the fixed costs are amortised over more seat-miles and variable costs such as fuel are more efficiently consumed in longer flights.

Given that Emirates does spend most on variable costs, the company is to be commended on how successful it has become considering managers have invested so much in variable costs that they were uncertain of. The company has managed these variable costs very well.

References

D'Cruz, A. (2014). How does Emirates manage to rake in profits from their A380 flights operating to so many destinations? Retrieved November 10, 2014.

SUNNEARY,

Understanding and distinguishing between fixed and variable costs is important in any industry, especially aviation. An airline must understand its costs structure to ensure that the revenue per flight is enough to cover the airline’s costs per flight hour on that particular flight. This means that the price of the ticket must at least be high enough to cover the fixed and variable costs and in order to make a profit, the price of the ticket should include the price of the fixed and variable costs, and then some. To come up with the appropriate ticket price, airlines must first understand that fixed and variable costs behave differently; variable costs will fluctuate depending on activity level while fixed costs are independent of activity level. Two common aviation costs include fuel and hangar rental. As noted on a scatter diagram, fuel costs are variable because the total amount of the cost at the end of a period increases at a constant rate in tandem with the number of flight hours while hangar rental costs are fixed because the number of flight hours does not affect the total costs of the hangar rental. If a flight from destination A to destination B takes ten hours and the airplane typically consumes 3,600 gallons per hour, and it costs $3 per gallon, then management could budget that the variable cost for that flight will be $108,000 and it will have to charge $10,800 per hour to cover the fuel costs. For the same flight, the fixed costs will have to be accounted for as well to get the true cost of the flight per passenger. If the hangar rental fee is $100,000 a year, and the plane is expected to fly 800 hours that year, then it will need to charge $125 per hour to cover the fixed costs, $1,250 for the ten hour flight. Ultimately, it will cost the airline $109,250 in variable and fixed costs for this ten hour flight and if the airplane has a 300 seat capacity, the airline should charge at least $364.17 per ticket in order to break even. Variable costs are usually easier to distinguish and easier to calculate while fixed costs are more difficult to calculate into the ticket price and therefore should take priority. There can be a lot of hidden fixed costs when the airline misjudges the number of flight hours for a certain year, resulting in ticket prices that are too low to cover the fixed portion of the total costs. Fixed costs should also be looked at more closely because often, certain actions can be done to reduce the overall fixed costs such as increasing flight hours, updating the rental agreement, or moving to location with cheaper rent.

References

Battles, B. (2003, February 1). Costs come in many flavors: Variable vs. fixed | AviationPros.com. Retrieved from http://www.aviationpros.com/article/10387227/costs-come-in-many-flavors-variable-vs-fixed

Hilton, R. W., & Platt, D. E. (2014). Managerial accounting: Creating value in a dynamic business environment (10th ed.). New York, NY: McGraw-Hill Education.

TO MUCHINA:

PS: PLEASE RESPOND TO MY CLASSMATES POSTS THE RESPONSE CAN BE POSTITIVE OR NEGATIVE...MORE AS YOU WERE TALKING TO THEM DIRECTLY.

4.4

TO MUCHINA: YOU NEVER COMPLETED ASSIGNMENT 4.4.

HERE IS WHAT YOU MISSED:

1. Refer to Case 6-46 at the end of Chapter 6.

1. Compute requirement 2, except you can build or use an existing Excel Spreadsheet to calculate the fixed and variable costs of the airport’s cost behavior pattern.
• Also, complete requirement 4. The spreadsheet must accompany the submission.

ATTACHED IS THE PROBLEM THAT THEY REFERRED TOO IN MY BOOK.