2. Compute the following question Canadian Adventure recently required Deep Alaska Air. Deep Alaska has been in business for many years and provide charter flight for remote finishing and camping ethusiaasts. When the campany originally started in to business, aircraft, insurance and fuel were relatively inexpensive. Pilot salaries was by far the most significant cost factor and has continued to be used as the basis for allocating overhead. Heretofore, the company has company has classified all costs, other than pilot salaries as overhead. The company prices trips to customers at 150% of “cost” Canadian was concerned about the appropratness of the costing/pricing technique and has engaged you to study this issue. With goal of improving Deep Alaska overhead operations.
Aggrigated data for the most receint year are:
Pilot salaries……………………………………..$350,000
Aircraft depreciation (6,000 engine hours)………935,000
Insurance (fixed annual cost)…………………….400,000
Fuel ($11 per gallon)……………………………..900,000
Other costs………………………………………..125,000
Includes amount paid for “wait time” that varies considerably by trip
Sample data from three specific recent flights is as follws:
Flight A Flight B Flight C
Pilot salaries $350 $615 $400
Engine hours on flight 3 1 9
Fuel used 60 gals 20 gals 180 gals
a) Using the existing scheme determine the overhead application rate and price for flight A, B and C
b) Is “Job” costing approperate for non manufacturing business like Deep Alaska
c) Evaluate the merits of the overhead allocation scheme in use by the company
d) Using the engine hours to allocate overhead and classify pilot salaries as a direct labour and fuel as direct material cost prepare a revised pricing schedule for the three flights (continue to assume that flights are priced at 150% of cost)
e) If pricing is revised as described in part (d), what is likely results on profits?