Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companys 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 (120 seats 40% occupancy $80 ticket price)	$	3,840			100.0	%
Variable expenses ($14.00 per person)		672			17.5
Contribution margin		3,168			82.5	%
Flight expenses:
Salaries, flight crew	$	310
Flight promotion		660
Depreciation of aircraft		360
Fuel for aircraft		175
Liability insurance		240
Salaries, flight assistants		710
Baggage loading and flight preparation		200
Overnight costs for flight crew and assistants at destination		70
Total flight expenses		2,725
Net operating loss	$	(443	)

The following additional information is available about flight 482:

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.

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.

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.

If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.

Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

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?

2.

The Walton Toy Company manufactures a line of dolls and a sewing kit. Demand for the companys products is increasing, and management requests assistance from you in determining an economical sales and production mix for the coming year. The company has provided the following data:

Product	Demand Next year (units)	Selling Price per Unit		Direct Materials		Direct Labor
Debbie	66,000	$	37.00	$	4.30	$	3.50
Trish	58,000	$	5.00	$	1.20	$	0.84
Sarah	51,000	$	35.50	$	8.84	$	5.60
Mike	37,000	$	15.00	$	3.60	$	4.20
Sewing kit	341,000	$	9.60	$	4.80	$	0.49

The following additional information is available:

The companys plant has a capacity of 115,730 direct labor-hours per year on a single-shift basis. The companys present employees and equipment can produce all five products.

The direct labor rate of $7 per hour is expected to remain unchanged during the coming year.

Fixed manufacturing costs total $545,000 per year. Variable overhead costs are $3 per direct labor-hour.

All of the companys nonmanufacturing costs are fixed.

The companys finished goods inventory is negligible and can be ignored.

Required:

1. How many direct labor hours are used to manufacture one unit of each of the companys five products?

2. How much variable overhead cost is incurred to manufacture one unit of each of the companys five products?

3. What is the contribution margin per direct labor-hour for each of the companys five products?

4. Assuming that direct labor-hours is the companys constraining resource, what is the highest total contribution margin that the company can earn if it makes optimal use of its constrained resource?

5. Assuming that the company has made optimal use of its 115,730 direct labor-hours, what is the highest direct labor rate per hour that Walton Toy Company would be willing to pay for additional capacity (that is, for added direct labor time)?

3)