Profits have been decreasing for several years at Pegasus Airlines. In an effort
ID: 2465111 • Letter: P
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.
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.
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.)
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.
Explanation / Answer
Dropping flight 482 would have loss of $ 145 on the airline's profits.
Flight Kept Dropping Flight 482 Ticket revenue (100 seats × 40% 2,400 100 % 0 occupancy × $60 ticket price) 0 Variable expenses ($14.00 per person) 560 23.3 0 Contribution margin 1840 76.7 % 0 Flight expenses: Salaries, flight crew 370 370 Flight promotion 660 0 Depreciation of aircraft 480 480 Fuel for aircraft 175 0 Liability insurance 240 160 Salaries, flight assistants 720 0 Baggage loading and flight preparation 175 175 Overnight costs for flight crew and assistants at destination 60 0 Total flight expenses 2,880 1185 Net operating loss (1,040) -1185Related Questions
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