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 (105 seats x 40% occupancy $2,940 546 100.0% 18.6 81.4 $70 ticket price) Variable expenses ($13.00 per person) Contribution margin Flight expenses: 2,394 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 $ 360 660 510 155 300 710 185 80 2,960 assistants at destination Total flight expenses Net operating loss $ (566) The following additional information is available about flight 482 a. 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 b. 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 C. 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 d. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight. e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible f. 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 1. What is the financial advantage (disadvantage) of discontinuing flight 482

Explanation / Answer

Pegasus Airlines

Contribution margin lost if the flight is discontinued                 ($2,394)

Less: Avoidable flight costs when flight 482 is discontinued –

Flight promotion                                                  $660

Fuel for aircraft                                                    $155

Liability Insurance                                               $100

Salaries – Flight Assistants                                  $710

Overnight cost for flight crew and assistants      $80

Total avoidable costs                                                                   $1,705

Financial disadvantage if the flight 482 is discontinued            ($689)

Hence, the financial disadvantage of discontinuing flight 482 is ($689).

Costs that are irrelevant to the decision of discontinue or continue and Explanation –

Salaries of flight crew –

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