Problem 11-21 Dropping or Retaining a Flight (L011-2] Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company's thinking about dropping several flights that appear to be unprofitable. A typical Income statement for one round-trip of one such flight (Might 482) is as follows: 100.00 $15,840 1,296 14,544 91.84 Ticket revenue (10 soate * 40 occupancy 9220 ticket price) Variable expenses (11,00 per per Contribution margin Flight expens lalaries, flight crew Fight promotion Depreciation of airerate Tul for airerat Liability Insurance taleria, Asistenta Dags loading and flight preparation Overnight conta for light crew and assistant destinatie Total light expenses Het operating Test # 1,600 770 1,700 5,100 1.300 1,700 12.470 (2.924) The following additional Information is available about flight 482: a. Members of the flight crew are paid fored annual salaries, whereas the sight assistants are paid based on the number of round trios The following additional Information is avaliable about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are pald 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 ls dropped, Pegasus Airlines has no authorization at present to replace it with another flight. e. Alrcraf depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. Dropping Might 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? Financial inadvantage Problem 11-21 Dropping or Retaining a Flight (L011-2] Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company's thinking about dropping several flights that appear to be unprofitable. A typical Income statement for one round-trip of one such flight (Might 482) is as follows: 100.00 $15,840 1,296 14,544 91.84 Ticket revenue (10 soate * 40 occupancy 9220 ticket price) Variable expenses (11,00 per per Contribution margin Flight expens lalaries, flight crew Fight promotion Depreciation of airerate Tul for airerat Liability Insurance taleria, Asistenta Dags loading and flight preparation Overnight conta for light crew and assistant destinatie Total light expenses Het operating Test # 1,600 770 1,700 5,100 1.300 1,700 12.470 (2.924) The following additional Information is available about flight 482: a. Members of the flight crew are paid fored annual salaries, whereas the sight assistants are paid based on the number of round trios The following additional Information is avaliable about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are pald 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 ls dropped, Pegasus Airlines has no authorization at present to replace it with another flight. e. Alrcraf depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible. Dropping Might 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? Financial inadvantage
