PROBLEM 10-21A Dropping or Retaining a Flight LO 10-2 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 Ticket revenue (175 seats x 40% occupancy x $200 ticket price). Variable expenses ($15 per person) Contrbution margin Flight expenses: $14,000 1.050 12,950 100.0% 7.5 92.5% Salaries, flight crew Fight promotion Depreciation of aircrait Fuel for aircraft Liability insurance Salaries, flight assistants. Baggage loading and flight preparation Overnight oosts for flight crew and assistants at 1,800 750 1,550 5,800 4,200 1,500 1.700 destination Total flight expenses Net operating loss. 300 17,600 $ (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 com in a "high-risk" are be unafected by a decision to drop flight 482. the destination of the flight is remaining two-thirds would 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' flights are bing filled compared to an industry average of60%. The scheduling officer has explained"that Pegasus' 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