Number of fares increased by 10-30% in 2015 over the last 5 years
Quarterly profits decreased in 2015 over the same quarter of last 5 years
Chief's conclusion- Operating profit increase is responsible for lower profits
Prethinking-
Profit = Total Revenue- Total cost
Total cost is also comprised of operating and non operating cost. Two assumptions that need to hold true for conclusion to be true-
1. Total revenue must increase proportionally if total sales has increased
2. Total cost must increase for profit to decline and it should be the operating costs that are responsible for increase in total costs.
Analyzing answer choices:
A. If they saw higher profits, their total revenue might have increased more than the total cost. So, it doesn't prove that with jets, their operating costs did not increase- Incorrect
B. Passengers preferred jets - this only explains the increase in fares- does nothing to explain the operating costs- Incorrect
C. This is tricky. Number of flights might have reduced by 50% lets say but what if the cost of operating per flight has more than doubled- that would also mean increase in operational costs - Incorrect
D. Less fuel per person would mean less variable cost. But operating cost can include fixed costs too which might be responsible for higher operating costs- Incorrect
E. This provides an alternate explanation to decline in profits. If 35% of the fares contributed nothing to revenue, then the 10-30% increase in fares might not have led to increase in revenue. In fact, it can lead to decrease in revenue which might be responsible for decline in profits despite the cost remaining the same- Correct