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 (170 seats x 408 occupancy x $220 ticket price) Variable expenses ($19.00 per person) Contribution margin Flight expenses: $14,960 100.0 1, 292 13, 668 8.6 91.48 Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and 2,000 780 1,550 5, 700 5, 400 1, 300 1,900 assistants at destination Total flight expenses Net operating loss 19,230 (5, 562) 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. Aircraft depreciation 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 avroll Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482?

Answer 1

Contribution margin lost of the tour is discontinued		-13668
Less: Flight costs that can be avoided
Flight promotion	780
Fuel for aircraft	5700
Liability insurance	1800
Salaries, flight assistants	1300
Overnight costs for flight crew and assistants at destination	600	10180
Net increase(decrease) in profits if the flight is discontinued		-3488
Financial (disadvantage) (3488)