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

Ticket revenue (200 seats 40% occupancy $220 ticket price) $ 17,600 100.0 %

Variable expenses ($15.00 per person) 1,200 6.8

Contribution margin 16,400 93.2 %

Flight expenses:

Salaries, flight crew $ 1,700

Flight promotion 760

Depreciation of aircraft 1,800

Fuel for aircraft 5,000

Liability insurance 4,800

Salaries, flight assistants 1,200

Baggage loading and flight preparation 1,700

Overnight costs for flight crew and assistants at destination 800

Total flight expenses 17,760

Net operating loss $ (1,360 )

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 companys 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?

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Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 44,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total

Direct materials $ 25 $ 1,100,000

Direct labor 10 440,000

Variable manufacturing overhead 3 132,000

Fixed manufacturing overhead 7 308,000

Variable selling expense 4 176,000

Fixed selling expense 6 264,000

Total cost $ 55 $ 2,420,000

The Rets normally sell for $60 each. Fixed manufacturing overhead is $308,000 per year within the range of 36,000 through 44,000 Rets per year.

Required:1.

1. Assume that due to a recession, Polaski Company expects to sell only 36,000 Rets through regular channels next year. A large retail chain has offered to purchase 8,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chains name on the 8,000 units. This machine would cost $16,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. What is the financial advantage (disadvantage) of accepting the special order? (Round your intermediate calculations to 2 decimal places.)

2. Refer to the original data. Assume again that Polaski Company expects to sell only 36,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 8,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. What is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

3. Assume the same situation as described in (2) above, except that the company expects to sell 44,000 Rets through regular channels next year. Thus, accepting the U.S. Armys order would require giving up regular sales of 8,000 Rets. Given this new information, what is the financial advantage (disadvantage) of accepting the U.S. Army's special order?

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Birch Company normally produces and sells 43,000 units of RG-6 each month. The selling price is $25 per unit, variable costs are $16 per unit, fixed manufacturing overhead costs total $195,000 per month, and fixed selling costs total $30,000 per month. Employment-contract strikes in the companies that purchase the bulk of the RG-6 units have caused Birch Companys sales to temporarily drop to only 10,000 units per month.

Birch Company estimates that the strikes will last for two months, after which time sales of RG-6 should return to normal. Due to the current low level of sales, Birch Company is thinking about closing down its own plant during the strike, which would reduce its fixed manufacturing overhead costs by $43,000 per month and its fixed selling costs by 10%. Start-up costs at the end of the shutdown period would total $14,000. Because Birch Company uses Lean Production methods, no inventories are on hand.

Required:

1. What is the financial advantage (disadvantage) if Birch closes its own plant for two months?

2. Should Birch close the plant for two months?

3. At what level of unit sales for the two-month period would Birch Company be indifferent between closing the plant or keeping it open?