Ret 6 A typical income statement for one round-trip of one such flight (flight 4
ID: 2580322 • Letter: R
Question
Ret 6 A typical income statement for one round-trip of one such flight (flight 482) is as follows Ticket revenue (115 seats x 40% occupancy x $75 ticket price) Variable expenses ($14.00 per person) Contribution margin Flight expenses: 2.5 points $3,450 644 100.0% 18.7 2, 806 81·3% Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft $ 380 730 490 150 210 740 175 Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination 80 Total flight expenses Net operating loss 2,955 $ (149) 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 payrollExplanation / Answer
If flight would be discontined,
Loss of contribution (2806)
Add: Savinng of Fixed costs (refer notes)
Salaries of flight crew -
Flight promotion 730
Depreciation on aircraft -
Fuel for aircraft 150
Liability insurance 70
Salaries for flight assistants 740
Baggage loading and flight preparation -
Overnight costs for flight crew and assistants 80
Total (1036)
Loss woud increase to 1036 if the flight is discountinued. Hence, flight should not be discontinued. Contribution from flight helps in recovering unavoidable fixed costs.
Notes : 1. salary of flight crew would still be incurred as dropping the flight would not lead to reduce the number of flight crew members.
2. Flight promotion being specifically linked to flight would in save in case the flight is being discontinued.
3. Depreciaton would still be incurred as it is because of obsolescence and not because of wear and tear.
4. Fuel charges as being specifically linked to running of flight woulf be saved.
5. Only on third of Liability insurance is specifically linked to flight.
6. Salaries of flight assistants is paid on the basis of round trips made, so they would be saved in case the flight is discontinued.
7. Baggage loading and flight prparaton continue to be incurred even if the flight is discontinued.
8. Overnights costs are incurred at destination so they would also be saved.
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