How many aircraft must be in service to break even at Virgin America?

After several years of losses, Virgin America recently announced that it anticipates a profit for 2013. Although the company is expecting a profit for 2013, it still is not out of the woods.  Critics have called for greater cost control at Virgin America.

The following table contains selected financial and other data for Virgin America for the years of 2012 and 2011.

Virgin America

Selected financial data for twelve months ended December 31,

 

Partial income statement:

2012

2011

Operating revenues  $         1,332,837,000  $         1,037,108,000
Total operating expenses  $         1,364,570,000  $         1,064,504,000
Operating income/loss  $                 (31,733)  $                 (27,396)
Selected data:
Aircraft in service

51

39

Financial data source here.

Questions

(The high-low method should be used to estimate costs for all of the following questions.)

  1. Using “Aircraft in service” as the cost driver, calculate Virgin America’s:
    • Variable cost per aircraft
    • Fixed costs
    • Total cost equation
  2. Based on the cost equation you just estimated, calculate Virgin America’s:
    • Contribution margin per aircraft in service
    • Breakeven point based on number of aircraft in service
  3. Suppose Virgin America were to have 62 aircraft in service in 2013.  What would you expect its operating income/loss to be?
  4. What additional information could be used to calculate a more accurate cost estimate?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. †Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. †The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.

About Dr. Wendy Tietz, CPA, CMA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Prentice-Hall.

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