A typical income statement for one round-trip of one such flight (flight 482) is

Question

A typical income statement for one round-trip of one such flight (flight 482) is as follows: 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

contribution margin lost 2310 Less:avoidable flight cost flight promotion 690 fuel 165 liability insurance 90 salaries 1110 overnight cost 60 net increase/decrease 195

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