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 (120 seats × 40% occupancy × $60 ticket price) $ 2,880 100.0 % Variable expenses ($15.00 per person) 720 25 Contribution margin 2,160 75 % Flight expenses: Salaries, flight crew $ 360 Flight promotion 710 Depreciation of aircraft 460 Fuel for aircraft 175 Liability insurance 270 Salaries, flight assistants 680 Baggage loading and flight preparation 185 Overnight costs for flight crew and assistants at destination 70 Total flight expenses 2,910 Net operating loss $ (750 ) The following additional information is available about flight 482: 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. 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. 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. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. 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. What is the financial advantage (disadvantage) of discontinuing flight 482?

Answer 1

Solution:

Statement showing impact of dropping flight 482 on Airline Profit - Pegasus Airline
Particulars		Amount
Contribution margin lost if flight is discontinued		-$2,160.00
Less: Flight cost can be avoided if the flight is discontinued
Flight promotion	$710.00
Fuel for aircraft	$175.00
Liability insurance	$90.00
Salaries, flight assistant	$680.00
Overnight costs for flight crew and assistants at destination	$70.00	$1,725.00
Financial advantage (disadvantage) if the flight is discontinued		-$435.00