Question

Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 20 percent.

Segmented income statements for a typical month appear as follows (all amounts in millions of dollars):

Routes Within U.S. Within Europe Between U.S. and Europe Sales $ 3.37 $ 2.85 $ 2.90 Variable costs 1.21 1.00 1.80 Fixed costs allocated to routes 1.68 1.29 1.39 Operating profit (loss) $ 0.48 $ 0.56 $ (0.29 )

Required: a. Prepare a differential cost schedule. (Enter your answers in millions rounded to 2 decimal places.)

Answer 1

Given
			($ in Millions)
Routes	With In US	Within Europe	Between US and Europe	Total
Sale	$          3.37	$        2.85	$                    2.90	$ 9.12
variable cost	$          1.21	$        1.00	$                    1.80	$ 4.01
fixed cost allocated to routes	$          1.68	$        1.29	$                    1.39	$ 4.36
operating profit	$          0.48	$        0.56	$                  (0.29)	$ 0.75
Required;			($ in Millions)
	Same as present	Dropping	Difference
Revenue	$          9.12	$        6.22	$                  (2.90)
Less : variable cost	$        (4.01)	$      (2.21)	$                    1.80
Contribution margin	$          5.11	$        4.01	$                  (1.10)
Less : fixedcost	$        (4.36)	$      (3.49)	$                    0.87
Operating profit (loss)	$          0.75	$        0.52	$                  (0.23)
Note :
Revenue will decrease by 2.90
and Fixed cost will reduce by 20%