Reference no: EM132716205

Air Canada Brun's new service will offer daily departures from Ottawa to Paris this summer. The fixed operating cost for this flight, regardless of the number of passengers on board, is estimated at $ 70,000. The aircraft has a capacity of 310 seats, all priced at $ 675, and all fully refundable if the ticket is not used. Air Canada Brun estimates that, for a typical flight, all seats will be sold, but that the number of passengers who will not show up for their flight will follow a discrete uniform distribution between 1 and 20 inclusive (i.e. the probability that 1 passenger will not show up equal the probability that 2 passengers will not show up equal the probability that 3 passengers will not show up and so on until 20. The probability that 21 or more passengers will not show up is zero) . To mitigate this risk, Air Canada Brun is over-selling (i.e. selling more tickets than the capacity of the aircraft). However, it must compensate each passenger with a ticket who is denied boarding because the aircraft is full. This compensation amounts to $ 260. In addition, the company must provide a ticket from a competing company to the refused passenger, which is equivalent to the ticket price. Use the Newsvendor model to estimate how many overbooked tickets Air Canada Brown should sell for one Ottawa-Paris flight.