Question

2 Problem 12-21 Dropping or Retaining a Flight [LO12-2) 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. 12 points A typical income statement for one round-trip of one such flight (flight 482) is as follows: eBook $15,640 1,224 14,416 100.00 7. 92.26 Print Ticket revenue (170 seats * 409 occupancy $230 ticket price) Variable expenses ($10.00 per person) Contribution margin Flight expenses Salaries, flight crew Flight promotion Depreciation of aircraft Puol for aircraft Liability Insurance Salaries, flight awal tants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination Total flight expenses Net operating loss $ 1,700 790 1,550 5.900 5.400 1,500 1,750 References BOD 19,390 $(4,974) The following additional Information is available about flight 482: a. 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. 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 of the flight 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 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. d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight e. Alrcraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. of aircraft in its fleet or the number of flight crew on its

Answer 1

A Cost Salaries, flight crew Depreciation of aircraft 1 Liability insurance (two-thirds) Baggage loading and flight preparation Reason Fixed annual salaries, which will not change. Sunk cost. Two-thirds of the liability insurance is unaffected by this decision This is an allocated cost that will continue even if the flight is discontinued. $ (14,416) S $ S Contribution margin lost if the tour is discontinued Less:fligts costs that can be avoided ig the flight is discontinued Flight promotion o Fuel for aircraft 1 Liability insurance(5400*1/3) 2 Salaries flight assistants 3 Overnight costs for flight crew and assistants 4 Net increase(decrease) in profits of the flights is discontinued 5 6 So Financial Disadvantage 7 790 5,900 1,800 1,500 800 $ 10,790 $ (3,626) $ $ (3,626)