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Possible error on figure 4?

In-flight Broadband
New answer on Sep 25, 2023
2 Answers
410 Views
Anonymous A asked on Sep 24, 2023

On figure 4 of this question, we are told that the fixed costs are $ per plane per year:

  • The startup must pay satellite operators an annual satellite fee. (50K)
  • In addition, the startup must pay the operator for every megabyte downloaded in-flight. (0.1 / MB)
  • The airline charges a yearly licensing fee. (75K)
  • The investment costs include amortized acquisition and installation costs. (25K)

We calculate that the total fixed costs are 50K + 75K + 25K = 150K. 

However, in the solution, we are told to find the fixed cost per plane to be 150K / 600 (where 600 is the number of planes in its fleet) = $250 per plane. 

Is this not a contradiction? To me, this shows that the metric in table 4 is NOT per plane per year. 

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Best answer
Anonymous replied on Sep 25, 2023

Dear,

Thanks for the question. After reviewing the case, I believe the confusion can be clarified as follows:

  • The total fixed costs per plane are $150,000
  • When we break down these fixed costs on a per-flight basis, it amounts to $250 per flight ($150,000/600).

The case instructions state that each plane completes 600 flights over the years, indicating that they operate more than once per year, which is a reasonable assumption.

Therefore, it is essential to determine whether you intend to conduct the break-even analysis on a per-flight or per-plane basis. The solution provided in the case follows the former approach, focusing on calculating the required number of customers for each flight.

This involves:

  1. Calculating the fixed cost per flight, which is $250, as demonstrated earlier
  2. Assuming an average data consumption of 100 MB per customer per flighy
  3. Assuming that the revenue per customer on each flight remains constant at $15.

I hope this clarification addresses any concerns. I think it's only a matter of understanding that “flight” is a different concept of “plane”.

If you have any further questions or require additional clarification, please do not hesitate to reach out to me via direct message.

Best,

Antonio

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