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 (185 seats × 40% occupancy × $230 ticket price) | $ | 17,020 | 100.0 | % | ||
Variable expenses ($16.00 per person) | 1,184 | 7 | ||||
Contribution margin | 15,836 | 93 | % | |||
Flight expenses: | ||||||
Salaries, flight crew | $ | 1,800 | ||||
Flight promotion | 780 | |||||
Depreciation of aircraft | 1,650 | |||||
Fuel for aircraft | 5,300 | |||||
Liability insurance | 4,800 | |||||
Salaries, flight assistants | 1,400 | |||||
Baggage loading and flight preparation | 1,950 | |||||
Overnight costs for flight crew and assistants at destination | 600 | |||||
Total flight expenses | 18,280 | |||||
Net operating loss | $ | (2,444 | ) | |||
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?
Contribution margin lost if the flight is discontinued | -15836 | ||
Less: Flight costs that can be avoided | |||
Flight promotion | 780 | ||
Fuel for aircraft | 5300 | ||
Liability insurance | 1600 | =4800/3 | |
Salaries, flight assistants | 1400 | ||
Overnight costs for flight crew and assistants at destination | 600 | 9680 | |
Net increase(decrease) in profits if the flight is discontinued | -6156 | ||
Financial (disadvantage) (6156) |
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 × $70 ticket price) $ 3,220 100.0 % Variable expenses ($14.00 per person) 644 20 Contribution margin 2,576 80 % Flight expenses: Salaries, flight crew $ 380...
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 (165 seats × 40% occupancy × $220 ticket price) $ 14,520 100.0 % Variable expenses ($19.00 per person) 1,254 8.6 Contribution margin 13,266 91.4 % Flight expenses: Salaries, flight crew $...
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 (190 seats × 40% occupancy × $220 ticket price) $ 16,720 100.0 % Variable expenses ($17.00 per person) 1,292 7.7 Contribution margin 15,428 92.3 % Flight expenses: Salaries, flight crew $...
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 (195 seats × 40% occupancy × $200 ticket price) $ 15,600 100.0 % Variable expenses ($16.00 per person) 1,248 8 Contribution margin 14,352 92 % Flight expenses: Salaries, flight crew $...
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 (175 seats × 40% occupancy × $220 ticket price) $ 15,400 100.0 % Variable expenses ($18.00 per person) 1,260 8.2 Contribution margin 14,140 91.8 % Flight expenses: Salaries, flight crew $...
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 (190 seats × 40% occupancy × $220 ticket price) $ 16,720 100.0 % Variable expenses ($17.00 per person) 1,292 7.7 Contribution margin 15,428 92.3 % Flight expenses: Salaries, flight crew $...
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 (105 seats × 40% occupancy × $75 ticket price) $ 3,150 100.0 % Variable expenses ($10.00 per person) 420 13.3 Contribution margin 2,730 86.7 % Flight expenses: Salaries, flight crew $...
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 (170 seats × 40% occupancy × $250 ticket price) $ 17,000 100.0 % Variable expenses ($17.00 per person) 1,156 6.8 Contribution margin 15,844 93.2 % Flight expenses: Salaries, flight crew $...
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: $ 15,840 1,296 14,544 100.0% 8.2 91.8% Ticket revenue (180 seats x 40% occupancy * $220 ticket price) Variable expenses ($18.00 per person) Contribution margin Flight expenses: Salaries, flight crew Flight promotion Depreciation...
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: What is the financial advantage or disadvantage of discontinuing flight 482? $ 3,450 552 2,898 100.0% 16 84% Ticket revenue (115 seats x 40% occupancy x $75 ticket price) Variable expenses ($12.00 per...