Analysis of Replacement Decision
The present case is about one of the flying airlines company which wants to take the replacement decision as its old truck loader is having remaining useful life of one year so the company wants to replace the old loader with a new loader. The new loader can be purchased for $ 20000, the company will get $5000 from the sale old loader so we can say the cost of new loader will require an additional cash outflow of $15000 that is cost of new loader $20000 (-) proceeds from the sale of the load loader $5000. The new loader is more efficient in its working as the variable cost for new loader is $ 50000 and the variable cost of old loader is $80000. That means with the installation of new loader a savings in variable cost is there of $30000. The savings in cost is equivalent to inflow of cash in financial terms.
Here we present the analysis of both the loader’s:
|
Analysis of Old Loader |
|
|
Particulars |
Amount |
|
Cost of Loader |
$ 1,00,000.00 |
|
Useful Life |
4 |
|
Depreciation |
$ 25,000.00 |
|
Salvage Value |
$ 5,000.00 |
|
Annul cash Flow (Year 1 to 4) |
$ 80,000.00 |
|
Analysis of New Loader |
|
|
Particulars |
Amount |
|
Cost |
$ 20,000.00 |
|
Cash Outflow (Variable cost) |
$ 50,000.00 |
|
Initial Investment |
|
|
Cost of acquisition |
$ 20,000.00 |
|
Less: Amount realised from the sale of old Loader |
$ 5,000.00 |
|
Net Outflow |
$ 15,000.00 |
|
Less: Decrease in Variable cost |
$ 30,000.00 |
|
Net Savings in Cost (in the year of purchase) |
$ 15,000.00 |
Conclusion:
With the above analysis we can see that there is net savings of $15000 with the installation of the new loader as savings I cost is equal to cash inflow. Hence, we should recommend replacing the old loader with the new loader immediately that is at the end of 3rd year of the useful life of old loader. If we wait for the 4th year to end then the sale value of old loader will be zero that means savings in the cost will also reduce that is why we highly recommend the company to replace the old loader with the new loader as of now only.
The current case is about the airline company which wisher to opt an alternative route for the flights which operate in between Japan and Hawaii. The present route of the flight is without any stop that is the flights are brakeless. If the company runs the flight with a break journey and takes the stop at Fiji airport then it will have more passengers traveling with the same flight. So, the company wants to analyse the profitability in both the situation as if the flight rout remains the same that is it starts from Japan and ends at Hawaii or if the flight has one stop in between covering the three stops that is Japan, Fiji and Hawaii.
The analysis under both the situation is shown below:
|
Statement of Profit of existing route |
||
|
Passenger Revenue |
$ 2,40,000.00 |
|
|
Cargo Revenue |
$ 80,000.00 |
|
|
Total Revenue |
$ 3,20,000.00 |
|
|
Crew Cost |
$ -2,000.00 |
|
|
Fuel Cost |
$ -21,000.00 |
|
|
Meals and services |
$ -4,000.00 |
|
|
Aircraft Maintenance |
$ -1,000.00 |
|
|
Total cost |
$ -28,000.00 |
|
|
Net profit |
$ 3,48,000.00 |
Analysis of Profitability of Flight Route
|
Statement of Profit of new Route |
||
|
Passenger Revenue |
$ 2,51,000.00 |
|
|
Cargo Revenue |
$ 80,000.00 |
|
|
Total Revenue |
$ 3,31,000.00 |
|
|
Crew Cost |
$ -3,400.00 |
|
|
Fuel Cost |
$ -26,000.00 |
|
|
Meals and services |
$ -4,900.00 |
|
|
Aircraft Maintenance |
$ -1,000.00 |
|
|
$ -5,000.00 |
||
|
Total additional cost |
$ -40,300.00 |
|
|
Net profit |
$ 2,90,700.00 |
Conclusion:
From the above analysis it is clear that the existing route is more profitable for the company as the profit from existing route is $ 348000 and the profit from the new route is $ 290700. If we think purely on financial grounds then it is not recommended to the company to change its route and continue to operate on the same route as it is more profitable for the company.
The other things that need to be considered other than the financial factors before taking the decision to change the flight route and add one stop in the route that is at Fiji port. The other factors that need to be considered are:
The Japan and Hawaii route has very heavy traffic that can cause the flights to get delayed and because of that the passengers will face too many problems and that will cause dissatisfaction among passengers. That is why the company must evaluate the traffic conditions on such route (Stevenson and Hojati, 2007).
The company need to take licences to operate the flights on such routes and need to take permit to enter into the country boundaries. That is why before changing the route of the flight the company need to take these legal factors in purview (Puterman, 2014).
The company need to analyse as if more passengers will add to travel in the flight and the demand of passengers as well because a company not only operates for earning profit but also to meet its social and ethical duties (Thornton, Ocasio and Lounsbury, 2015).
It is very important to have a look over the environment for the new route as the environment impacts the operations of the company. It is very important for the company to consider environment on the top priority and bad environment conditions can cause heavy injuries to the passengers and the flight too (Nahmias and Cheng, 2009).
The company need to consider on priority the market completion as other companies flights are operating on that route and the revenue that they generate by operating on that route.
In the present case a Japanese tourist agency did approaches the operators of the flying airlines to give them on rent a charter flight. The rent they need to pay for that flight is $160000. The airline company need to consider various other factors before deciding whether to accept or decline the offer of the tourist agency. The company also need to take into account as if they take the charter on rent then the cargo revenue need to be compromised by the company.
Factors to Consider
The financial analysis is presented below:
|
Statement of profit (Existing situation) |
||
|
Particulars |
Amount |
Amount |
|
Passenger Revenue |
$ 2,50,000.00 |
|
|
Cargo Revenue |
$ 30,000.00 |
|
|
Total Revenue (B) |
$ 2,80,000.00 |
|
|
Variable expenses of the flight |
$ 90,000.00 |
|
|
Fixed costs allocated |
$ 80,000.00 |
|
|
Total Expenses (A) |
$ 1,70,000.00 |
|
|
Profit (A-B) |
$ 1,10,000.00 |
|
Statement of profit (Special Offer) |
|
|
Particulars |
Amount |
|
Revenue from Special offer |
$ 1,60,000.00 |
|
Less: Variable cost ($90000-$5000) |
$ 85,000.00 |
|
$ 75,000.00 |
|
|
Loss of cargo revenue |
$ -30,000.00 |
|
Net Revenue |
$ 45,000.00 |
* The allocated fixed cost is irrelevant cost for decision making. Hence, we ignored the same (Bierman Jr and Smidt, 2012).
With this analysis we can see that the special offer of the tourist agency gives the net revenue of $45000. Hence, if the company has spare capacity then it should accept the offer of the travel agency and must take on rent the charter to get extra revenues.
The other factors that can be considered to use the spare capacity as if we do not use the spare capacity that will lead to machine idealisation and this will lead to machine deterioration.
The demand of passenger need to be considered as the demand will increase in future or decrease in future. If there are chances of increase in the demand of the flight, then the company will not accept the special offer (Jardine and Tsang, 2013).
The time period for which the tourist agency requires the charter must also be considered before taking any decision.
|
Usual Revenues and costs |
New contract Revenues and costs |
|||
|
Particulars |
Amount |
Amount |
Amount |
Amount |
|
Passenger Revenue |
$ 2,50,000.00 |
$ 1,60,000.00 |
||
|
Cargo Revenue |
$ 30,000.00 |
|||
|
Total Revenue (B) |
$ 2,80,000.00 |
$ 1,60,000.00 |
||
|
Variable expenses of the flight |
$ 90,000.00 |
$ 85,000.00 |
||
|
Fixed costs allocated |
$ 80,000.00 |
$ 80,000.00 |
||
|
Total Expenses (A) |
$ 1,70,000.00 |
$ 1,65,000.00 |
||
|
Profit (A-B) |
$ 1,10,000.00 |
$ -5,000.00 |
The above analysis depicts that if company does not have spare capacity the company should not accept the special offer of the Japanese tourist agency. From the above analysis we can see that if company accepts the offer without having spare capacity then it will incur a loss of $5000.
Other factors that need to be considered are:
The market reputation of the tourist agency as if the market reputation of the Japanese tourist agency has a good track record, then only company will associate with the Japanese agency as this will increase its goodwill in the market (Hwang and Masud, 2012).
The airlines company need to know the legal regulations implied if they accepts the offer and what other legal requirements they need to follow.
References:
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
Hwang, C.L. and Masud, A.S.M., 2012. Multiple objective decision making—methods and applications: a state-of-the-art survey (Vol. 164). Springer Science & Business Media.
Jardine, A.K. and Tsang, A.H., 2013. Maintenance, replacement, and reliability: theory and applications. CRC press.
Joosten, E.A., DeFuentes-Merillas, L., De Weert, G.H., Sensky, T., Van Der Staak, C.P.F. and de Jong, C.A., 2008. Systematic review of the effects of shared decision-making on patient satisfaction, treatment adherence and health status. Psychotherapy and psychosomatics, 77(4), pp.219-226.
Nahmias, S. and Cheng, Y., 2009. Production and operations analysis (Vol. 4). New York: McGraw-Hill/Irwin.
Puterman, M.L., 2014. Markov decision processes: discrete stochastic dynamic programming. John Wiley & Sons.
Stevenson, W.J. and Hojati, M., 2007. Operations management (Vol. 8). Boston: McGraw-Hill/Irwin.
Thornton, P.H., Ocasio, W. and Lounsbury, M., 2015. The institutional logics perspective. John Wiley & Sons.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
