Problem 13-21 (Algo) Dropping or Retaining a Flight [LO13-2] Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about 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 (200 seats x 40% occupancy x $240 ticket price) $ 19, 200 100.0% Variable expenses ($17.00 per person) 7.1 1,360 17,840 Contribution margin 92.9% Flight expenses: $ 1,900 Salaries, flight crew Flight promotion 760 Depreciation of aircraft Ful 1,650 P Fuel for aircraft 5,400 Liability insurance 4,800 Salaries, flight assistants 1,200 1,900 Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination 700 Total flight expenses Net operating loss 18,310 $ (470) following additional is 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 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 What is the financial advantage (disadvantage) of discontinuing flight 482? LILLY ace 4, 20 1,200 Salaries, flight assistants Baggage loading and flight preparation. 1,900 Overnight costs for flight crew and assistants at destination 700 Total flight expenses 18,310 $ (470) Net operating loss 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 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. What is the financial advantage (disadvantage) of discontinuing flight 482? Financial advantage Financial (disadvantage) necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, has gathered the following information relating to its own cost of producing the carburetor internally: Per Unit 13,000 Units Per Year $ 13 $ 169,000 Direct materials Direct labor 9 117,000 Variable manufacturing overhead 3 39,000 Fixed manufacturing overhead, traceable 3* 39,000 6 78,000 Fixed manufacturing overhead, allocated Total cost *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). $ 34 $ 442,000 Required: 1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted? 3. Suppose that if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product. The segment margin of the new product would be $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier? 4. Given the new assumption in requirement 3, should the outside supplier's offer be accepted? > Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Suppose that if the carburetors were purchased, Troy Engines, Limited, could use the freed capacity to launch a new product. The segment margin of the new product would be $130,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 13,000 carburetors from the outside supplier? Financial advantage 120,000 X