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 (180 seats 40 occupancy $250 ticket price) $ 18,000 100 0 Variable expenses ($18 00 per person) 1,296 7 2 Contribution margin 16,704 92 8 Flight expenses Salaries, flight crew $ 1,800 Flight promotion 770 Depreciation of aircraft 1,500 Fuel for aircraft 5,400 Liability insurance 4,800 Salaries, flight assistants 1,500 Baggage loading and flight preparation 1,950 Overnight costs for flight crew and assistants at destination 500 Total flight expenses 18,220 Net operating loss $ (1,516) 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 Required 1 What is the financial advantage (disadvantage) of discontinuing flight 482 Financial (disadvantage)

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Posted on Jul 18, 2024

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

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 (180 seats 40% occupancy $250 ticket price)	$ 18,000	100.0%
Variable expenses ($18.00 per person)	1,296	7.2
Contribution margin	16,704	92.8%
Flight expenses:
Salaries, flight crew	$ 1,800
Flight promotion	770
Depreciation of aircraft	1,500
Fuel for aircraft	5,400
Liability insurance	4,800
Salaries, flight assistants	1,500
Baggage loading and flight preparation	1,950
Overnight costs for flight crew and assistants at destination	500
Total flight expenses	18,220
Net operating loss	$ (1,516)

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.