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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 round-trip of one such flight (flight 482) is as follows: 911 Ticket revenue (175 seats 400 oceupancy * 5210 ticket price $14.700 100.00 Variable expenses ($15.00 per person) 1,330 Contribution margin 13,370 Flight expenses Salaries, light crew $ 1.800 light promotion 790 Depreciation of aircraft 1,800 Fuel for aircraft 5,100 Liability Seurance 6,000 Halaries, light assistant 1,400 Baggage loading and light preparation 1.800 Overnight costs for thight crew and assistante at destination 700 Total tight expenses 10,190 Het operating loss 4,020) The following additional information is available about fight 482: a. Members of the light crew are paid fixed annual salaries, whereas the light assistants are paid based on the number of round trips b. One-third of the ability Insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the night 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 t Dropping light 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
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