Reference no: EM132464951

ABC Airlines' first class cabins have 10 seats in each plane. ABC's overbooking policy is to sell up to 11 first class tickets, since cancellations and no-shows are always possible (and indeed are quite likely). For a given flight on ABC Airlines, there were 11 first class tickets sold. Suppose that each of the 11 persons who purchased tickets has a 20% chance of not showing up for the flight, and that the events that different persons show up for the flight are independent.

Suppose that the cost of each first class ticket is $12,000. (Let's assume that this $12,000 contributes entirely to profit since the variable cost associated with a passenger on a flight is close to zero.) Suppose further that any overbooked seat costs the airline $30,000, which is the cost of the free ticket issued to the passenger plus some potential cost in damaged customer relations.

If the probability of not showing up increases, ABC Airlines may even consider selling up to 12 first class tickets. What is the minimum probability of not showing up that may drive ABC to make this decision?