Question

Cold Duck Airlines flies between Tacoma and Portland. The company leases planes on a year-long contract at a cost that averages $600 per flight. Other costs (fuel, flight attendants, etc.) amount to $550 per flight. Currently, Cold Duck's revenues are $1,000 per flight. All prices and costs are expected to continue at their present levels. If it wants to maximize profit, Cold Duck Airlines should?

Answer 1

Answer: Continue flying until the lease expires and then drop the run.

Explanation: From the info given, it can be seen that Cold Duck Airlines is not generating a profit from this airline. Cold Duck's total costs per flight is $1150 (550 + 600). However Cold Duck only makes $1000 in revenue per flight. This means that this flight is performing at a loss. In order for Cold Duck to maximise their profit they need to consider removing this flight altogether, especially because it was indicated that all prices and costs are expected to continue at the present level. However to avoid any penalties from the lease if they were to cancel it, they should rather continue flying this flight up until the lease expires, then cancel the lease and remove this flight altogether.