Differential Analysis: The Key to Decision Making PROBLEM 10-21A Dropping or Retaining a Flight [LO10-2] 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 A typical income statement for one round-trip of one such flight (flight 482) is as follows: unprofitable. Tickot revenue (175 seats 40% occupancy $200 ticket price) Variable expenses ($15 per person). Contribution margin Flight expenses $14,000 100.0% 1,050 75 12950 92.5% . Salaries, flight crew Flight promotion Depreciation of aircraft . .. 1,800 Fuel for aircraft Liability insurance Salaries, flight assistants. Baggage loading and flight preparation Overnight costs for flight crew and assistants at 750 1,550 5,800 4,200 1,500 1,700 300 17,600 Net operating loss. (4,650) 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 at present to replace it with another flight. n is due entirely to obsolescence. Depreciation due to wear and tear is 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 drop no negligible Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its flee or the number of flight crew on its payroll. f. Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. uire The airline's scheduling officer has been criticized because only about 50% of the seats on Pegasus' flights are being filled compared to an industry average of 60%. The scheduling officer has explained that Pegasus' averag flights, but that doing so would reduce profits. Explain how this could happen. I. 2. e seat occupancy could be improved considerably by eliminating about 10% of its pany manufactures and sells a single product called a Ret. Operating at capacity, the company Costs associated with this level of production and sales are PROBLEM 10-22A Accept or Reject a Special Order [LOIO-4 30,000 Rets per year. can produce and sell ven below Unit Total 15 450,000