Question

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 Liability insurance Salaries, flight attendants Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination 3,250 1,300 2,600 12,400 7,800 900 3,100 520 Total flight expenses 31,870 Net operating loss $ (7,950) 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.

Answer 1

Solution:

Statement showing impact of dropping flight 482 on Airline Profit - Pegasus Airline
Particulars		Amount
Contribution margin lost if flight is discontinued		-$23,920.00
Less: Flight cost can be avoided if the flight is discontinued
Flight promotion	$1,300.00
Fuel for aircraft	$12,400.00
Liability insurance	$2,600.00
Salaries, flight assistant	$900.00
Overnight costs for flight crew and assistants at destination	$520.00	$17,720.00
Financial advantage (disadvantage) if the flight is discontinued		-$6,200.00