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, the company is thinking about 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 (180 seats x 40% occupancy x $230 ticket price) Variable expenses ($17.00 per person) Contribution margin Flight expenses: 16,560 100.0% 1,224 7.4 15,336 92.6% $ 2,000 760 1,700 5,700 4,800 1,400 Baggage loading and flight preparation 1,900 Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Overnight costs for flight crew and assistants at destination 600 Total flight expenses Net operating loss 18,860 $(3,524)

Explanation / Answer

Contribution margin lost if the tour is discontinued -$15,336 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $760 Fuel for aircraft $5,700 Liability insurance($4,800 * 1/3) $1,600 Salaries, flight assistants $1,400 Overnight costs for flight crew and assistants $600 $10,060 Net increase (decrease) in profits if the flight is discontinued -$5,276

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