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

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

1. Contribution margin lost if the tour is discontinued -$2,244 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $740 Fuel for aircraft $175 Liability insurance($150 * 1/3) $50 Salaries, flight assistants $700 Overnight costs for flight crew and assistants $70 $1,735 Net increase (decrease) in profits if the flight is discontinued -$509

ID: 2533775 • 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

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

Explanation / Answer

Contribution margin lost if the tour is discontinued -$2,244 Less flight costs that can be avoided if the flight is discontinued: Flight promotion $740 Fuel for aircraft $175 Liability insurance($150 * 1/3) $50 Salaries, flight assistants $700 Overnight costs for flight crew and assistants $70 $1,735 Net increase (decrease) in profits if the flight is discontinued -$509

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

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

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