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 (115 seats 40% occupancy × $3,450 644 100.0% 18.7 $75 ticket price) Variable expenses ($14.00 per person) Contribution margin Flight expenses: 2,806 81.3% 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 $350 660 480 160 270 700 185 6 0 2,865 assistants at destination Total flight expenses Net operating loss $(59) 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

Explanation / Answer

1) Contribution margin lost if the flight is discontinued -2,806 less Flight costs that can be avoided if the flight is discontinued: Flight promotion 660 Fuel for aircraft 160 liability insurance (270*1/3) 90 Salaries,Flight assistants 700 overnight costs for flight crew and assistants 60 1670 net decrease in profits if the flight is discontinued -1,136

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