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:

Ticket revenue (110 seats × 40%     occupancy × $60 ticket price)	$	2,640	100	%
Variable expenses ($13.00 per person)		572	21.7
Contribution margin		2,068	78.3	%
Flight expenses:
Salaries, flight crew	$	320
Flight promotion		710
Depreciation of aircraft		380
Fuel for aircraft		200
Liability insurance		180
Salaries, flight assistants		710
Baggage loading and flight preparation		190
Overnight costs for flight crew and      assistants at destination		50
Total flight expenses		2,740
Net operating loss	$	(672)

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.

  

Required:
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.)

Answer 1

1)
	Contribution margin lost if the flight is discontinued						-2,640
	less Flight costs that can be avoided if the flight is
	discontinued:
	Flight promotion					710
	Fuel for aircraft					200
	liability insurance		(180*1/3)			60
	Salaries,Flight assistants					710
	overnight costs for flight crew and assistants					50	1730
	net decrease in profits if the flight is discontinued						-910