PROBLEM 1221 Dropping or Retaining a Flight [LO2] Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companys 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 = seat capacity 40% occupancy $200 ticket price per person) . . . . . . . . . . $14,000 Variable expenses ($15 per person) . . . . . . . . . . . . . . . . .

Flight expenses: 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 at destination . . . . . . . .

1,050 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,950

1,800 750

1,550 5,800 4,200 1,500 1,700

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 remain-ing 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 companys 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 airlines profits. 2. The airlines scheduling officer has been criticized because only about 50% of the seats on Pegasuss flights are being filled compared to an industry average of 60%. The scheduling officer has explained that Pegasuss average seat occupancy could be improved considerably by eliminat-ing about 10% of its flights, but that doing so would reduce profits. Explain how this could happen.