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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
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 roundtrip of one such flight flight is as follows:
The following additional information is available about 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 Onethird of the liability insurance is a special charge assessed against flight because in the opinion of the insurance company,
the destination of the flight is in a "highrisk" area. The remaining twothirds would be unaffected by a decision to drop flight
c The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground
equipment. Dropping flight would have no effect on the company's total baggage loading and flight preparation expenses.
d If flight 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 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its
payroll.
Required:
What is the financial advantage
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