southwest Airlines offers four flights per weekday from Cleveland, Ohi

QUESTION

southwest Airlines offers four flights per weekday from Cleveland, Ohio, to Tucson, Arizona. Adding a fifth flight per weekday would cost $15,000 per flight, or $110 per available seat. Calculate the incremental costs borne by Southwest following a decision to go ahead with a fifth flight per day for a minimal 60-flight trial period. What is the marginal cost? In this case, is incremental cost or marginal cost relevant for decision-making purposes?
Solution: Marginal costs are the cost effect of one-unit changes in output. Incremental cost is the cost effect associated with a given managerial decision. Incremental costs may also relate to output changes, but the output change involved is that of a relevant block or increment of service. In this instance, the incremental cost associated with a decision to go ahead with a fifth flight per day for a minimal 60-flight trial¦

period is $900,000 (=$15,000 60). The marginal cost per passenger is only $110. In this case, the incremental cost of $900,000 is the relevant cost for decision making purposes. With expected revenues in excess of $900,000, Southwest should go ahead with the planned expansion.

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