Date:November 6, 2010
Re:Belle Aire Charter Income
Thank you for choosing our offices to handle all of your financial needs. I understand you are having a problem figuring out why your company is currently not making any profit and are considering removing one of your charter planes. I hope to address all of your concerns and help find a solution to make your business profitable and help you stay competitive in the market you are in.
After reviewing your income statement and seeing how you allocate costs, I created a segmented income statement (Ex-1). This statement allows us to see exactly how the costs are broken down according to your current system. According to your specifications, it seems as though only one of your lines, the PC37 makes any money, and unfortunately it’s not enough to cover your costs. At first glance it looks as though you should eliminate the Jet Plane you offer because of its extremely large loss and second to go would be your lowest budget offering, the PN5, however this is not correct. Because your industry is so competitive, it would be particularly unwise to stop offering any of your lines because you would be losing out on a whole segment of the market; people will go elsewhere to find what they want and your bottom line would be even worse because many of your costs remain. The current economy has people looking more closely at how they spend their money, but they don’t want to spend less and get a lower quality product or service, which is exactly why your PC37 makes the most money. I did happen to notice in your notes that you allocate your pilots salaries according to hours flown and in our meeting you asked to add 25% more to the Jet’s hours to make it even while calculating how much to allocate which makes sense seeing as your pilot flies both planes and the jet and should be paid more.
What I find incorrect about your income statements is the fact that you allocate your...