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 light (light 482) is as follows: $15,960 1,292 14,666 100.0% 8.1 91.9% Ticket revenue (190 seats 40% occupancy $210 ticket price) Variable expenses ($17.00 per person) Contribution margin Flight expenses Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, Flight wssistants Bassege loading and light preparation Overnight costs for flight crew and assistants at destination Total flight expenses Bit operating loss $ 2,000 770 1,550 5,300 5,100 1,200 1,850 600 18.20 5,702) The following additional information is available about flight 482 a. Members of the flight crew are paid fixed annual salaries, whereas the light assistants are paid based on the number of round trips they complete b. One third of the linblity 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-sk" area. The remaining two thirds would be unaffected by a decision to drop light 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 fight preparation expenses. d. If light 482 is dropped. Peaasus Airlines has no authorization atoresent to replace it with another flicht 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. 1. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of alrcraft in its fleet or the number of flight crew on its payroll Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482
