PROBLEM $1221$ Dropping or Retaining a Flight $[$LO$2]$

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 unprofitable. A

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

PROBLEMS $$

Ticket revenue $(175=$ seat capacity $\backslash$times $40\%$

occupancy $\backslash$times $$200$ ticket price per person$)..........$ $$14,000100\%$

Variable expenses $($$$15$ per person$).................1,0507\mathrm{.}5$

Contribution margin $.............................12,95092\mathrm{.}5\%$

Flight expenses:

Salaries, flight crew $...........................1,800$

Flight promotion $..............................750$

Depreciation of aircraft $.........................1,550$

Fuel for aircraft $...............................5,800$

Liability insurance $............................4,200$

Salaries, flight assistants $........................1,500$

Baggage loading and flight preparation $............1,700$

Overnight costs for flight crew at destination $........300$

Total flight expenses $.............................17,600$

Operating loss $..................................$ $$(4,650)$

The following additional information is available about the flight:

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:

$1.$ Prepare an analysis showing what impact dropping flight $482$ would have on the airline$$s profits.

$2.$ The airline$$s scheduling officer has been criticized because only about $50\%$ of the seats on

Pegasus$$s flights are being filled compared to an industry average of $60\%.$ The scheduling officer

has explained that Pegasus$$s average seat occupancy could be improved considerably by eliminating about $10\%$ of its flights, but that doing so would reduce profits. Explain how this could happen