Case information

Profits have been decreasing for several years at Cheapflight Airlines. In an effort to improve the company's performance the company is thinking about dropping several fights that appear to be unprofitable.

A typical income statement for one round-trip of one such flight (flight 324) is as follows:

Ticket revenue (160 seats * 40% occupancy * $250 ticket price)

$ 16,000.00

Variable expenses ($ 20 per person)

$ 1,280.00

Contribution margin

$ 14,720.00

Flight expenses

Salaries, flight crew

$ 6,000.00

Flight promotion

$ 900.00

Depreciation of aircraft

$ 1,700.00

Fuel for aircraft

$ 5,610.00

Liability insurance

$ 5,100.00

Salaries, flight assistants

$ 1,400.00

Baggage loading and flight preparation

$ 1,700.00

Overnight costs for flight crew and assistants at destination

$ 1,050.00

Total Flight expenses

$ 23,460.00

Net operating loss

$ (8,740.00)

The following additional information is available about flight 324:

a

Members of the flight crew and flight assistants are paid fixed annual salaries.

b.

Only half of the liability insurance is traceble to this flight.

c.

The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of group equipment. Dropping a flight would have no effect on the company's total baggage loading and flight preparation expenses.

d.

If the flight gets dropped the company will at the moment have no authorization to replace it with another flight.

e.

Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

f.

Dropping a flight would not allow the company to reduce the number of aircrafts in its fleet or the number of flight crew on its payroll.

1. Indicate for each category how much of the cost is differential (i.e., how much of the cost would be avoided if the flight was dropped). Some of your answers may be equal to $0.

Flight expenses

Differential Cost

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 at destination