Activity Based Costing - Airport Complex
2. Discuss the problems and opportunities connected with assessing the profitability of the different services offered by the airport to the airlines and their customers. You are, among other things, asked to consider whether you would recommend the use of Full Cost, Activity Based Costing, or Contribution Margin Concept to the company and state the reasons for your recommendation.
Problems
* Costs are not sufficiently adjusted to the income, specifically; management finds it difficult to get an overview of how the various business areas utilize the airport’s resources and services. An explanation of this is that since the costs related to the airport are almost all capacity costs, which means that the costs do not vary with the level of production and can be reduced or avoided only by shutting down the business, these costs do not increase or decrease in proportion to the increase or decline on income. In this case, assessing the profitability of the different services are quite hindered since comparing the difference between the revenues and costs would not be accurate since almost all costs are fixed which means that it is irrelevant in general.
* Prices for building-served and remote gates are currently not differentiated although building-served gates service passengers better than remote gates. The slight difference in prices for building-served and remote gates makes it ambiguous as to whether which earns more than whom. This increment does not show financially, even though it is known that building-served gates better service passengers, how large the latter has earned more than the remote gates.
* Relation between take-off duties and passenger duties – occasional imbalances in the case of small aircraft with many passengers and large aircraft with few passengers
Opportunities * Differentiation in passenger fees for passengers who merely touch down at the airport, but never leave the aircraft as opposed to passengers who only
Problems
* Costs are not sufficiently adjusted to the income, specifically; management finds it difficult to get an overview of how the various business areas utilize the airport’s resources and services. An explanation of this is that since the costs related to the airport are almost all capacity costs, which means that the costs do not vary with the level of production and can be reduced or avoided only by shutting down the business, these costs do not increase or decrease in proportion to the increase or decline on income. In this case, assessing the profitability of the different services are quite hindered since comparing the difference between the revenues and costs would not be accurate since almost all costs are fixed which means that it is irrelevant in general.
* Prices for building-served and remote gates are currently not differentiated although building-served gates service passengers better than remote gates. The slight difference in prices for building-served and remote gates makes it ambiguous as to whether which earns more than whom. This increment does not show financially, even though it is known that building-served gates better service passengers, how large the latter has earned more than the remote gates.
* Relation between take-off duties and passenger duties – occasional imbalances in the case of small aircraft with many passengers and large aircraft with few passengers
Opportunities * Differentiation in passenger fees for passengers who merely touch down at the airport, but never leave the aircraft as opposed to passengers who only