Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?

Question

Abraham Potter

Business

11 September, 23:10

Two small airlines provide shuttle service between Las Vegas and Reno. The services are alike in every respect except that Fly Right bought its airplane for $500,000, while Fly by Night rents its plane for $30,000 a year. If Fly Right were to go out of business, it would be able to rent its plane to another airline for $30,000. Which airline has the lower costs?

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Answers (2)

Know the Answer?

Arabella Ferguson · Answer 1

Neither the costs are identical.

Explanation:

In the given scenario both of the airlines offer similar services to customers and the only difference is the way their aircraft was obtained. While the first company bought its own for $500,000 the second one is renting theirs for $30,000.

Their costs are however considered to be the same because if the first company goes out of business it's estimate of their plane is $30,000 per year. So even when they owned the plane cost of running it was the same as the second company.

Lamont Waller · Answer 2

the economic cost is the same for both airlines

Explanation:

The economic cost considers both accounting and implicit costs. Fly by Night's economic cost = $30,000 per year which is equal to its annual lease. Fly Right's economic cost is also $30,000, because that is the opportunity cost of using the airplane. If they decided to buy a bigger (or smaller) plane, they could lease this one at $30,000, so that is its economic cost.