Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companys performance, consideration is being given to 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 (110 seats 40% occupancy $65 ticket price)	$	2,860	100	%
Variable expenses ($13.00 per person)		572	20
Contribution margin		2,288	80	%
Flight expenses:
Salaries, flight crew	$	320
Flight promotion		680
Depreciation of aircraft		460
Fuel for aircraft		180
Liability insurance		240
Salaries, flight assistants		720
Baggage loading and flight preparation		200
Overnight costs for flight crew and assistants at destination		80
Total flight expenses		2,880
Net operating loss	$	(592)

The following additional information is available about flight 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 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.
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.
f.	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.

Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be indicated by a minus sign.)

contribution margin lost if the tour is discontinued
less flight costs that can be avoided if the flight is discontinued
flight promotion
fuel for aircraft
liabiity insurance
salaries, flight assistants
over night costs for flight assistants and crew
net increase (decrease) in profits if flight is disconinued

Question 2:

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 36,000 Rets per year. Costs associated with this level of production and sales are given below:

	Unit			Total
Direct materials	$	25		$	900,000
Direct labor		8			288,000
Variable manufacturing overhead		3			108,000
Fixed manufacturing overhead		5			180,000
Variable selling expense		4			144,000
Fixed selling expense		6			216,000
Total cost	$	51		$	1,836,000

The Rets normally sell for $56 each. Fixed manufacturing overhead is constant at $180,000 per year within the range of 29,000 through 36,000 Rets per year.

Required:
1.	Assume that due to a recession, Polaski Company expects to sell only 29,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chains name on the 7,000 units. This machine would cost $14,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

2.

Refer to the original data. Assume again that Polaski Company expects to sell only 29,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?

3.

Assume the same situation as that described in (2) above, except that the company expects to sell 36,000 Rets through regular channels next year. Thus, accepting the U.S. Armys order would require giving up regular sales of 7,000 Rets. If the Armys order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?