Question

Freefight Airlines is presently operating at 70 percent of capacity Management of the alline is considering dropping Freetlight'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 foxed costs would be reduced by 20 percent. Segmented income statements for a typical manth appear as follows all amounts in milions of dollars Routes W US $ 3.30 1.22 Within Furope S 2.70 1.01 Between U.S. and Europe $ 2.75 Varabic coats Fixed posts allocated to routes Operating profil $ 0.43S 0.45 $(0.401 Required: a. Prepare a diferential cost schedule (Enter your answers in millions rounded to 2 decimal places. Difference (all Status Quo Alternative: Drop U.S. to Europe the alternative Loss Variable casts Contribution margin Less Fixed costs Operating profil fons b. Should Freeflight drop the routes en Europe and the United States? No

Answer 1

Within U.S. 1 Given Routes Sales Variable cost Fixed cost allocated to routes Operating profit Within Europe Between US & Europe 3.30 2.70 2.75 1.22 1.01 1.81 1.65 1.24 1.34 0.43 0.45 -0.40 Particulars Revenue Less: Variable Cost Contribution margin Less: Fixed cost Operational Profit (loss) Same as present Dropping =C4+D4+E4 =SUM(C4:04) =SUM(C5:E5) 1 =SUMC5:05) =C10-C11 =D10-D11 =SUM(C6:56) =C13*0.8 =C12-C13 =D12-D13 Difference =D10-C10 =D11-C11 =D12-C12 =D13-C13 =D14-C14 Difference 6.00 -2.75 2.23 -1.81 Particulars Revenue Less: Variable Cost Contribution margin Less: Fixed cost Operational Profit (loss) Same as present Dropping 8.75 4.04 4.71 4.23 0.48 3.77 3.38 0.39 -0.94 -0.85 -0.09 2 No, Since the contribution margin and operational profit both are less in dropping.