2 Problem 12-21 Dropping or Retaining a Flight [LO12-2) Profits have been decrea

Question

2 Problem 12-21 Dropping or Retaining a Flight [LO12-2) 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. 12 A typical income statement for one round-trip of one such flight (flight 482) is as follows: eBook Print References Ticket revenue (175 seats 4ex occupancy x $239 ticket price) Variable expenses ($19.00 per person) Contribution margin Flight expenses $16,100 100.0% 1,33 8.3 14,776 91.7% s 1,700 770 1,658 5,988 Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at 1,480 1,700 destination Total flight expenses Net operating loss 18,420 (3,658) 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 h One-third nf the liahìlitvinsi irance is a snerialcharne assessed anainst flin ht 48?heranse in the nn inn n he ins innm nmnano Mc KPrev 2 of 3l Next > Hill

Explanation / Answer

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Contribution margin lost if the tour is discontinued -$14,770 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $770 Fuel for aircraft $5,900 Liability insurance($4,500 * 1/3) $1,500 Salaries, flight assistants $1,400 Overnight costs for flight crew and assistants $800 $10,370 Net increase (decrease) in profits if the flight is discontinued -$4,400

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