Profits have been decreasing for several years at Pegasus Airlines. In an effort
ID: 2499112 • Letter: P
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:
Overnight costs for flight crew and
assistants at destination
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.
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.
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.
If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.
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.
Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be indicated by a minus sign.)
Contribution Margin lost if the tour is discontinued:___________
Flight Promotion:________
Fuel for aircraft:_________
Liability insurance:___________
Salaries, Flight assistants:___________
Overnight costs for flight crew and assistants:___________
Net increase (decrease) in profits if the flight is discontinued:________________
occupancy × $200 ticket price) $ 14,000 100.0 % Variable expenses ($15 per person) 1,050 7.5 Contribution margin 12,950 92.5 % Flight expenses: Salaries, flight crew $ 1,800 Flight promotion 750 Depreciation of aircraft 1,550 Fuel for aircraft 5,800 Liability insurance 4,200 Salaries, flight assistants 1,500 Baggage loading and flight preparation 1,700
Overnight costs for flight crew and
assistants at destination
300 Total flight expenses 17,600 Net operating loss $ (4,650) 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.If flight 482 is dropped, Pegasus Airlines has no authorization 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.
1.Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be indicated by a minus sign.)
Contribution Margin lost if the tour is discontinued:___________
Flight Promotion:________
Fuel for aircraft:_________
Liability insurance:___________
Salaries, Flight assistants:___________
Overnight costs for flight crew and assistants:___________
Net increase (decrease) in profits if the flight is discontinued:________________
Explanation / Answer
Ticket revenue (175 seats × 40% occupancy × $200 ticket price) $14,000
Variable expenses ($15 per person) 1,050
Contribution margin 12,950
Flight expenses:
Flight promotion 750
Fuel for aircraft 5,800
Liability insurance 2,800
Salaries, flight assistants 1,500
Overnight costs for flight crew and
assistants at destination 300 11,150
Net Contribution 1800
Fixed Expense
Salaries, flight crew 1,800
Baggage loading and flight preparation 1,700
Depreciation 1,800
There is a net contribution of $1800, if the flight is not taken to high risk area. This can be increased if the Depreciation can be be reduced
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