MBA 540 Managerial Accounting

Assignment 3

Yibo, Dong
May 30, 2013

P 7-3: The Corporate Jet
Question a: Describe the formula being used to calculate the cost per passenger mile flown.
Answer:
The allocation of corporate headquarters costs and service department costs, such as data processing and security, is in fact a form of transfer pricing within the firm. In fact, most cost allocation problems involve transfer pricing problems. In this problem, which at first appears to be a cost allocation question, is really a transfer pricing problem.
In this problem, the formula being used consists of monthly expenditures for both fixe and variable costs divided by actual miles flown.

Question b: As passenger miles flown increases, what happens to the cost per passenger mile?
Answer:
With the increase in the number of passenger miles, the average price charged falls. In my opinion, with the increase in the number of passenger miles, the variable costs will increase, but the fixed cost is fixed. Thus, the average price charged will fall.

Question c: Describe what cause the monthly charge per passenger mile flown to fluctuate.
Answer:
In my opinion, the number of plane flying and the attendance rates cause the monthly charge per passenger mile flown to fluctuate.
From the problem, we know the planes almost always fly full, at least in the nonwinter months. In the nonwinter months, the number of plane flying and the attendance rates is high. However, the number of plane flying and the attendance rates is low in the winter months. Thus, in summer months, the price is low and in winter months it is high.

Question d: What other problems are present in the current system and what improvements do you suggest making?
Answer:
The price of the jet over the year is to base the charge per mile in normal (or average) passenger miles flown per month. At