Profits have been decreasing for several years at Pegasus Airlines. In an effort

Question

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (100 seats x 40% occupancy x $65 ticket price) Variable expenses ($14.00 per person) $2,600 100% 560 215 2,040 78.5% Contribution margin Flight expenses: Salanies, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salanies, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination $ 390 740 390 185 300 690 180 70 2,945 $905) Total flight expenses Net operating loss The following additional information is available about flight 482 a Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a "high-risk area. The remaining two-thirds would be unaffected by a decision to drop flight 482 c. The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparation expenses d Iif flight 482 is dropped. Pegasus Airlines has rno authonzation at present to replace it with another flight e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll Required: 1 Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Loss amounts should be indicated by a minus sign.)

Explanation / Answer

1.

Contribution margin lost if the tour is discontinued -$2,040 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $740 Fuel for aircraft $185 Liability insurance($300 * 1/3) $100 Salaries, flight assistants $690 Overnight costs for flight crew and assistants $70 $1,785 Net increase (decrease) in profits if the flight is discontinued -$255

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