Freeflight Airlines is presently operating at 70 percent of capacity. Management

Question

Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 20 percent. Segmented income statements for a typical month appear as follows (all amounts in millions of dollars): Routes Within U.S. Within Europe Between U.S. and Europe Sales $ 3.44 $ 2.61 $ 2.81 Variable costs 1.36 .82 1.32 Fixed costs allocated to routes 1.60 1.29 1.39 Operating profit (loss) $ .48 $ .50 $ .10 Required: a. Prepare a differential cost schedule. (Enter your answers in millions rounded to 2 decimal places. Loss should be indicated by minus sign.) b. Indicate whether Free flight should drop the routes between the United States and Europe. Yes No

Explanation / Answer

Routes After Drop Within US Within Europe between US & Europe Sales $        3.44 $                  2.61 $                                 2.81 $              -   Variable Cost $        1.36 $                  0.82 $                                 1.32 $              -   Fixed Cost allocated to routes $        1.60 $                  1.29 $                                 1.39 $         1.11 Operating Profit (Loss) $        0.48 $                  0.50 $                                 0.10 $       (1.11) No after drop loss would incur so don’t drop

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