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 × $70 ticket price)	$	3,080	100	%
Variable expenses ($14.00 per person)		616	20
Contribution margin		2,464	80	%
Flight expenses:
Salaries, flight crew	$	350
Flight promotion		690
Depreciation of aircraft		490
Fuel for aircraft		190
Liability insurance		300
Salaries, flight assistants		680
Baggage loading and flight preparation		200
Overnight costs for flight crew and      assistants at destination		60
Total flight expenses		2,960
Net operating loss	$	(496)

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. (Loss amounts should be indicated by a minus sign.)

  

Answer 1

Analysis showing the impact dropping flight 482 is as follows:

If the flight is dropped, it would make the company to lose $744 revenue which would otherwise help the company in atleast recovering some portion of its fixed costs.

Only the relevant costs are taken into consideration.

Hope this is helpful!!