Question

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
Flight promotion		660
Depreciation of aircraft		450
Fuel for aircraft		155
Liability insurance		210
Salaries, flight assistants		720
Baggage loading and flight preparation		175
Overnight costs for flight crew and assistants at destination		70
Total flight expenses		2,820
Net operating loss	$	(244	)

The following additional information is available about flight 482:

1. 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.

2. 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.

3. 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.

4. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.

5. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

6. 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.

Answer 1

Contribution margin lost of the tour is discontinued		-2576
Less: Flight costs that can be avoided
Flight promotion	660
Fuel for aircraft	155
Liability insurance	70		=210/3
Salaries, flight assistants	720
Overnight costs for flight crew and assistants at destination	70	1675
Net increase(decrease) in profits if the flight is discontinued		-901
Financial (disadvantage) (901)