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: $18,720 1,404 17,316 100.0% 7.5 92.5% Ticket revenue (195 seats x 40% occupancy * $240 ticket price) Variable expenses ($18.00 per person) Contribution margin Flight expenses: 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 assistants at destination Total flight expenses Net operating loss $ 1,500 760 1,700 5,500 5,100 1,200 1,750 800 18,310 $ (994) 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.

Answer 1

1.

Contribution margin lost if the tour is discontinued		-$17,316
Less flight costs that can be avoided if the flight is discontinued:
Flight promotion	$760
Fuel for aircraft	$5,500
Liability insurance($5,100 * 1/3)	$1,700
Salaries, flight assistants	$1,200
Overnight costs for flight crew and assistants	$800	$9,960
Net increase (decrease) in profits if the flight is discontinued		-$7,356