Written Assignment 6
Respond to the five questions below, providing at least 200 words per question. In your response, be sure to demonstrate a thorough understanding or application of the accounting principle.
- Explain the relationship between supply and demand, equilibrium, and breakeven.
- Describe the type of fare actions. Why are there so many types of fares?
- Explain the difference between indirect and direct costs. Give examples of each.
- What are fixed and variable costs and how are they the same or different from direct and indirect costs?
- Explain the difference between high yield spill and low yield spill.
Written Assignment 6
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Written Assignment 6
- The Relationship Between Supply and Demand, Equilibrium, And Breakeven
Supply and demand, equilibrium, and breakeven are standard terms used in business and economics and are related in one way or the other. Demand refers to the number of goods or services consumers are willing and able to purchase at a given price (Dean et al., 2020). Supply refers to the number of goods or services a producer is willing to supply at a given price. When supply exceeds demand, prices of goods and services tend to decrease (Dean et al., 2020). The opposite is true because prices rise when demand exceeds supply. If supply remains the same as the demand increases, prices will keep increasing till the point where the demand increases no more. The opposite applies when the demand remains constant and supply increase; prices will keep decreasing till the point where the supply can increase no more, and the price remains constant.
These points where prices are stable and constant are called equilibrium. Equilibrium is the point at which the consumer and supplier agree upon quantity demanded and quantity supplied (Dean et al., 2020). On the other hand, Breakeven defines the point at which a company is making neither a profit nor incurring a loss (Cafferky & Wentworth, 2014). This is where the cost of production has been met, and the revenue in hand does not have any profit within. The amount required for goods and services needs to be sold to return the production or manufacturing cost is reached.
- Types of Fare Actions
Airline fare come in various forms and types because it’s a complex of one-way or round-trip, a base fare, and additional fees and taxes (International Travel Network, 2019). They are broadly categorized into published fares and unpublished fares. According to International Travel Network (2019), the Published fare includes;
Apex fare – they are discounted international fares and usually purchased in advance.
Discount fare – they include cheaper fares that are offered for a short while, like seat sales.
Unrestricted, flexible, full fare, or walk-up fare – these are fares that can be chased, refunded, and purchased in the day. They are the baseline and regular fares.
Joint fare – these fares occur when two or more airlines are working together to reach a customer’s destination.
Through fare – this fare type goes along with the above fare types and occurs when flying through a gateway city.
Bereavement fare – is offered for bereaved family members or during imminent death as urgent or last-minute offers.
Open-jaw – it is a return ticket in which the departure and the destination are different each way.
Youth/child/senior fares – here, travel agents allow discounts for youth, child, or senior travellers.
Unpublished fares are not available online for booking. The different types of fares are the result of a dynamic pricing system that considers many distinct factors. Some of these factors include reservation time periods, the number of seats a fare category contains, the type of consumers using a particular flight, and competitor pricing on similar flights (International Travel Network, 2019).
- The Difference Between Indirect and Direct Costs
All businesses have both direct and indirect costs that are considered to enhance the accuracy of recordkeeping, reporting, and decision-making. The main difference is that direct costs can be traced to specific cost objects while indirect costs cannot (Financial Management, 2021). Direct costs are expenses that can easily be connected to a specific “cost object,” like products, projects, and departments. Indirect costs go beyond the expenses incurred when creating a product because the cost of maintaining and running a company is also included. Direct costs are like to production of a product or service, while indirect costs cannot be outrightly attributed to a specific cost centre (Surbhi, 2019).
Indirect costs mostly occur in administration and office, while direct costs in purchasing and producing goods. Unlike direct costs, indirect costs are not included in the cost of goods sold. Indirect costs are apportioned on a suitable basis, while direct costs are directly allocated to the particular cost unit. Direct cost is treated as part of the prime cost, while indirect costs are considered overheads. Direct cost is keyed in the Debit side of the trading account, while indirect cost appears in the Debit side of the profit and loss account (Surbhi, 2019). Examples of direct costs include Direct labor, Direct materials, Manufacturing supplies, commissions, and piece-rate wages. Examples of indirect costs include Rent, Utilities, General office expenses, Employee salaries like administrative, Professional expenses, and Other overhead costs (Surbhi, 2019).
- How Fixed and Variable Costs Differ from Direct and Indirect Costs
Costs can broadly be categorized into fixed costs, variable costs, direct costs, and indirect costs. Understanding the differences, similarities, and relationships between these costs is crucial because they help inadequate interpretation of the cost in a company (Surbhi, 2019). Fixed costs are costs that must exist for a business to exist, even if nothing is being produced. They remain constant even when the volume of sales or production changes. On the other hand, variable costs are subject to change in response to changes in the volume of sales or production. Variable cost can be zero if a company has zero units sold (Surbhi, 2019).
Both variable and fixed costs can either be direct costs or indirect costs. This can lead to further categorizations into direct and variable, direct and fixed, indirect and variable, indirect and fixed. Direct and variable are traceable, products costs in which total costs vary with output changes, such as direct material costs. Direct and fixed costs relate directly to products and are traceable costs that remain constant even if output changes (Financial Management, 2021). An example is a salary of a supervisor of tiles in a factory. Indirect and variable costs are non-traceable, do not relate directly to product costs but change with output changes, such as power cost at tiles factory. Indirect and fixed costs are traceable to products, do not directly relate to costs, but remain constant despite output changes, such as the salary of a supervisor, looking after production of tiles Y and tile X (Financial Management, 2021).
- High Yield Spill Vs. Low Yield Spill
A spill is a common term used in airlines to refer to passenger demand turned away from a flight because demand has exceeded capacity (Diodato, 2017). High yield spills occur when an excessive number of low-yield seats are sold early, thereby consuming inventory and closing out later bookings of higher-yield customers (Dempsey, 2011). It is associated with a reduced ability to accommodate more potential purchases since earlier booking customers have consumed the available space. It is common during high season, particularly with airlines with no revenue management strategies but makes haste to book seats in advance (Diodato, 2017) fully.
Low yield spill, on the other hand, occurs when an excessive number of potential higher-yield seats are held back. If these customers do not materialize, the carrier may be deprived of earlier sales to price-sensitive lower-yield customers (Dempsey, 2011). In this situation, seats may depart empty because of misallocation of inventory, though there is a demand. When there are many unsold seats or rooms closed to due time, it is considered a mistake. In the end, the airline will be forced to do everything possible to sell the remaining seats, including accepting a last-minute rate which may be very low (Diodato, 2017). Cancellations are also involved unless there is a cancellation policy.
References
Cafferky, M. E., & Wentworth, J. (2014). Breakeven analysis: The definitive guide to cost-volume-profit analysis. Business Expert Press.
Dean, E., Elardo, J., Green, M., Wilson, B., & Berger, S. (2020). Demand, Supply, and Equilibrium in Markets for Goods and Services. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).
Diodato, M. (2017). Spillage, spoilage, overbooking and over sale: how confusing! Franco Grasso. https://www.francograssorevenueteam.com/en/spillage-spoilage-overbooking-and-oversale-how-confusing/
Dempsey, S. P. (2011). The Airline Business. Instiute of Air & Space Law. https://www.mcgill.ca/iasl/files/iasl/ASPL614-Airline-Business.pdf
Financial Management. (2021). Types of Costs and Relationship of Direct & Indirect Costs with Fixed & Variable Costs. https://efinancemanagement.com/costing-terms/types-of-costs
International Travel Network. (2019). Types of Airfares: A Beginner’s Guide. https://blog.asaptickets.com/types-of-airfares/
Surbhi, S. (2019). Difference Between Direct and Indirect Expenses. Key Differences. https://keydifferences.com/difference-between-direct-and-indirect-expenses.html