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 such flight (Flight 482) follows:
Ticket revenue (150 seats × 80% occupancy × $575 ticket price) | $ | 69,000 | 100.0 | % | ||
Less: Variable expenses ($46 per person) | 5,520 | 8.0 | ||||
Contribution margin | 63,480 | 92.0 | % | |||
Less: Flight expenses: | ||||||
Salaries, flight crew | 8,600 | |||||
Flight promotion | 3,450 | |||||
Depreciation of aircraft | 6,900 | |||||
Fuel for aircraft | 33,100 | |||||
Liability insurance | 20,700 | |||||
Salaries, flight attendants | 2,400 | |||||
Baggage loading and flight preparation | 8,300 | |||||
Overnight costs for flight crew and attendants at destination | 1,380 | |||||
Total flight expenses | 84,830 | |||||
Net operating loss | $ | (21,350 | ) |
The following additional information is available about Flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the flight. 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 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 crew’s 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. Depreciation of aircraft 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. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)
Solution:
Statement showing impact of dropping flight 482 on Airline Profit - Pegasus Airline | ||
Particulars | Amount | |
Contribution margin lost if flight is discontinued | -$63,480.00 | |
Less: Flight cost can be avoided if the flight is discontinued | ||
Flight promotion | $3,450.00 | |
Fuel for aircraft | $33,100.00 | |
Liability insurance | $6,900.00 | |
Salaries, flight assistant | $2,400.00 | |
Overnight costs for flight crew and assistants at destination | $1,380.00 | $47,230.00 |
Financial advantage (disadvantage) if the flight is discontinued | -$16,250.00 |
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, consideration is being given to dropping several flights that appear to be unprofitable. A typical income statement for one such flight (Flight 482) follows: Ticket revenue (150 seats × 80% occupancy × $675 ticket price) $ 81,000 100.0 % Less: Variable expenses ($54 per person) 6,480 8.0 Contribution margin 74,520 92.0 % Less: Flight expenses: Salaries, flight crew 10,100...
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 such flight (Flight 482) follows: Ticket revenue (100 seats 80% occupancy * $325 ticket price) Less: Variable expenses ($26 per person) $26,000 2,080 100.0% 8.0 Contribution margin 23,920 92.0% Less: Flight expenses: Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft...
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 (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 $...
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 $...