Exercise 4-49 Dropping Product Lines (LO 4-4) Freeflight Airlines is presently o

Question

Exercise 4-49 Dropping Product Lines (LO 4-4) 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): Within Between U.S Routes Sales Variable costs Fixed costs allocated to routes Within U.S. Europe and Europe $ 3.31 1.20 1.62 2.71 0.93 1.22 $2.76 1.73 1.32 Operating profit (loss) 0.49 0.56 $(0.29)

Explanation / Answer

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Figures are in millions Status Quo Alternate Difference Revenue 8.78 6.02 2.76 Less: Variable Cost 3.86 2.13 1.73 Contribution 4.92 3.89 1.03 Fixed Cost 4.16 3.32 0.84 Operating Profit 0.76 0.57 0.19

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