Page 9 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

For example, if a fare of C$0.50 is charged for rural and city routes, the rural route would need 2.5
passengers to break‐even but the city route would need 4.9. This means that the cost per
kilometre for the city route is more expensive:

Cost per kilometre on rural route = $0.50 × 2.5 = $1.25

Cost per kilometre on city route = $0.50 × 4.9 = $2.45

The cost per kilometre on the inter‐city routes is much lower and can be calculated using the
numbers in the first (or any) line of the table as $0.05 × 19.2 = $0.96 per km.

These numbers can be confirmed by checking against other numbers in the table. For instance,
using the last line of the table:

Break‐even inter‐city passengers at a fare of $0.01 = $0.96 / $0.01 = 96 passengers

Break‐even rural passengers at a fare of $0.10 = $1.25 / $0.1 = 12.5 passengers

Break‐even city passengers at a fare of $0.10 = $2.45 / $0.10 = 24.5 passengers.

These match the table numbers to within a level expected by roundings differences.
Menta has then provided details of the average passenger load on each route for comparison to
the break‐even passenger numbers.

Inter‐city route

The pricing structure for inter‐city routes means that the break‐even calculations may not be of
much use to Menta, at least in the form given in the table. There is no one set price paid by all
customers on these routes as those who book early will pay lower prices and those who book late
will pay a higher amount. Also those who book services that start in the morning will pay a higher
fare than those who travel at less popular times.

Menta could still use the break‐even concept for pricing these routes. If it knows the fixed costs
of operating a particular route then once enough contribution has been earned from fares paid up
front to cover that position it knows that any further fares received will contribute directly to
profit. It could then, for instance, offer last minute deals to fill remaining seats, knowing that the
contributions received will hit profit directly and that it doesn’t have to worry about low fares not
covering costs.

Rural routes

The average passenger numbers on these routes is 7, which would mean that a fare of at least
C$0.02 would lead to a profitable position overall.
However, Menta prices competitively in this market at a level at which average loads do not cover
costs. It knows that at peak periods enough revenue is earned to offset losses made at off peak
periods. It also knows that the subsidies it receives from the government will boost profits.

Perhaps a more useful analysis would include the subsidies as an offsetting figure to the costs.

City routes

The average passenger numbers on these routes is 15, which would mean that a fare of at least
C$0.02 would lead to a profitable position overall.

Menta has similar issues with pricing on the city routes as with the rural routes.

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