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 (105 seats × 40%     occupancy × $70 ticket price)	$	2,940	100	%
Variable expenses ($11.00 per person)		462	15.7
Contribution margin		2,478	84.3	%
Flight expenses:
Salaries, flight crew	$	370
Flight promotion		740
Depreciation of aircraft		390
Fuel for aircraft		180
Liability insurance		270
Salaries, flight assistants		710
Baggage loading and flight preparation		170
Overnight costs for flight crew and      assistants at destination		50
Total flight expenses		2,880
Net operating loss	$	(402)

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

Solution:

Statement showing impact of dropping flight 482 on Airline Profit - Pegasus Airline
Particulars	Amount
Loss of contribution	-$2,478.00
Saving of Flight attendant salaries	$710.00
Saving in liability insurance cost ($270*1/3)	$90.00
Saving in flight promotion cost	$740.00
Saving in fuel cost	$180.00
Saving in overnight costs for flight crew and attendants at destination	$50.00
Net Increase (Decrease) in income due to dropping flight 482	-$708.00