MidCoast Airlines provides charter airplane services. In October, when the company is operating at 60% of its capacity, it receives a bid from the local college. The college is organizing a trip for a student group. The college budgeted only $36,000 for round-trip airfare. MidCoast Airlines normally charges between $56,000 and $66,000 for such service. MidCoast determines its total cost for the round-trip flight to Washington to be $51,600, which consists of the following.
Variable cost $ 28,600 Fixed cost 23,000 Total cost $ 51,600
Although the manager at MidCoast supports the college’s educational efforts, she is struggling to justify accepting only $36,000.
(a) What is the contribution margin from accepting the offer?
(b) Should the airline accept the $36,000 offer from the college?