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: $ 17,760 1,480 16,280 100.0% 8.3 91.7% $ Ticket revenue (185 seats x 40% occupancy X $240 ticket price) Variable expenses ($20.00 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 1,700 770 1,650 5,200 4,800 1,300 1,750 700 17,870 $(1,590) 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.

Answer 1

Contribution margin lost	($16,280)
Add : Savings from avoidable fixed costs
Salaries, flight assistants	$1,300
Liability insurance ($4,800*1/3)	$1,600
Flight promotion	$770
Fuel of aircraft	$5,200
Financial advantage	($7,410)

Financial (disadvantage)

$7,410