Question

The airline is presently offering its passengers to join in a club that entitles them to use the club facilities. The controller ascertained that all variable costs can be avoided if the club operation will be discontinued including some fixed costs:

1. Supervisor’s salaries $200,000

2. Airport fees 50,000

3. Depreciation on some equipment 100,000

A report showed a net loss from this department:

Sales Revenue 2,000,000

Less: Variable Costs

Food and beverages 700,000

Labor costs 400,000

Variable overhead 250,000

Contribution margin 650,000

Less: Fixed Expenses

Depreciation on furniture & equipment 300,000

Supervisor’s salaries 200,000

Insurance 100,000

Airport fees 50,000

General overhead, allocated 100,000

Net loss (100,000)

What will be the decision of the airline company? Provide solutions to your answer using the total cost and differential approach.

Answer 1

Keep the Club Operation Discontinue the club Difference Net Operating operation income increase or (decrease) (2,000,000) 2,000,000 700,000 400,000 250,000 650,000 700,000 400,000 250,000 (650,000) Sales Less: Variable expenses Food and beverages labor costs Variable overhead Contribution Margin Less: Fixed expenses Depreciation on furniture & equipment Supervisior salaries Insurance Airport fees General Overhead, allocated Net Loss 200,000 100,000 200,000 300,000 200,000 100,000 50,000 100,000 100,000 50,000 100,000 (400,000) (100,000) (300,000) No, Airline Company should not discontinue the club operations. As it will lead to increase in financial loss of $300,000 Note: Total Depreciation expense Less: Saving of expense if club discontinue Depreciation expense continue to happen 300,000 (100,000) 200,000