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

Question

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about 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 (170 seats x 40% occupancy x $210 ticket price) Variable expenses ($19.00 per person) Contribution margin Flight expenses: $14,280 100.0% 1,2929 12,988 91% Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants $ 1,900 770 1,600 5,900 4,800 1,400 2,000 700 19,670 at destination Total flight expenses Net operating loss $ (6,082)

Explanation / Answer

1.

Contribution margin lost if the tour is discontinued -$12,988 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $770 Fuel for aircraft $5,900 Liability insurance($4,800 * 1/3) $1,600 Salaries, flight assistants $1,400 Overnight costs for flight crew and assistants $700 $10,370 Net increase (decrease) in profits if the flight is discontinued -$2,618

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