Question

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, consideration is being given to dropping several flights that appear to be unprofitable.

  

A typical income statement for one such flight (Flight 482) follows:

  

Ticket revenue (150 seats × 80% occupancy × $675 ticket price)	$	81,000			100.0	%
Less: Variable expenses ($54 per person)		6,480			8.0
Contribution margin		74,520			92.0	%
Less: Flight expenses:
Salaries, flight crew		10,100
Flight promotion		4,050
Depreciation of aircraft		8,100
Fuel for aircraft		38,800
Liability insurance		24,300
Salaries, flight attendants		2,800
Baggage loading and flight preparation		9,700
Overnight costs for flight crew and attendants at destination		1,620
Total flight expenses		99,470
Net operating loss	$	(24,950	)

  

The following additional information is available about Flight 482:

a.	Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the flight.
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 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 crew’s 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.	Depreciation of aircraft 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 payroll.

  

Required:

1.	Prepare an analysis showing what impact dropping Flight 482 would have on the airline’s profits. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)

  

      

Answer 1

1.

Contribution margin lost if the tour is discontinued		-$74,520
Less flight costs that can be avoided if the flight is discontinued:
Flight promotion	$4,050
Fuel for aircraft	$38,800
Liability insurance($24,300 * 1/3)	$8,100
Salaries, flight assistants	$2,800
Overnight costs for flight crew and assistants	$1,620	$55,370
Net increase (decrease) in profits if the flight is discontinued		-$19,150