Question

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. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (175 seatsa40 oecupancy $200 ticket price) $ 14,000 100.0 1,05075 12,95092.5 Variable expenses ($15 per person) Contribution margin Flight expenses Salaries,flight crew Flight promotion Depreciation of aircraft Puel for aircraft Liability insurance Salaries, flight assistants Baggage loading and fiight preparation Overnight costs for flight crew and 5 1,800 750 1,550 5,800 4,200 1,500 1,700 assistants at destination Total flight expenses Net operating loss 17.600 (4,650 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 fight 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. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. t 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. Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 4827

Answer 1

• Statement showing profit (Loss) analysis on dropping the flight by the incremental method

Particulars	Amount
Loss in contribution due to dropping flight	12950
Add : savings in fixed costs
Flight promotion	300
Fuel	5880
Insurance liability	1400
Salary of flight assistance	1500
Total savings	9080
Incremental savings (loss)	(3870)

Here, incremental loss of $ 3870 on dropping flight. Hence, it is not advised to drop the flight.