Profits Profits have been decreasing for several years at Pegasus Airlines. In a

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Profits

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 round-trip of one such flight (flight 482) is as follows: Ticket revenue (120 seats Times 40% occupancy Times $65 ticket price) $ 3,120 100% Variable expenses ($10.00 per person) 480 15.4 Contribution margin 2,640 84.6% The following additional information is available about flight 482: 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. 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. 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. If flight 482 is dropped. Pegasus Airlines has no authorization at present to replace it with another flight. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. 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: Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Loss amounts should be indicated by a minus sign.)

Explanation / Answer

Details Amount Amount Contribution Margin Lost if the tour is discountinued -2640 Less avoidable Flight Cost Flight Promotion 710 Fule For Aircraft 160 Liability Insurance 80 Salaries, Flight Assistance 720 60 Total Avoidable cost 1730 Net Increase (Decrease) in Profits if the Flight is discotinued -910

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