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 Sales Variable costs Fixed costs allocated to routes Operating profit (loss) Within U.S. $3.27 1.21 1.67 se.39 Within Europe $2.76 1.00 1.24 $0.52 Between U.s. and Europe $ 2.81 1.80 1.34 $(0.38) Required: a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" If there is no effect. Enter your answers in millions rounded to 2 decimal places.) Status Quo Alternative: Drop U.S. to Europe Difference Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit (103) decrease decrease decrease decrease decrease b. Should Freeflight drop the routes between Europe and the United States? o Yes NO

Answer 1

Differential Cost Schedule
	Status Quo	Alternative: Drop US to Europe	Difference
Revenue	8.84	6.03	2.81	Decrease
Less: Variable Costs	4.01	2.21	1.8	Decrease
Contribution Margin	4.83	3.82	1.01	Decrease
Less: Fixed costs	4.25	3.4	0.85	Decrease
Operating Profit (Loss)	0.58	0.42	0.16	Decrease
No, as operating profit will reduce