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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 ights that appear to be unprotable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (170 seats x 40% occupancy x $200 ticket price) $ 13,600 100.0% Variable expenses ($18.00 per person) 1,224 9 Contribution margin 12,376 91% Flight expenses: Salaries, flight crew $ 1,800 Flight promotion 760 Depreciation of aircraft 1,500 Fuel for aircraft 5,900 Liability insurance 4,500 Salaries, flight assistants 1,300 Baggage loading and flight preparation 1,800 Overnight costs for flight crew and assistants at destination 700 Total flight expenses 18,260 Net operating loss 5 (5,884) The following additional information is available about ight 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 ofthe 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 clue to wear and tear is negligible. f. Dropping ight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number ofight crew on its payroll
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