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 690 Depreciation of aircraft 540 Fuel for aircraft 185 Liability insurance 270 Salaries, flight assistants 680 Baggage loading and flight preparation 200 Overnight costs for flight crew and assistants at destination 60 Total flight expenses 2,945 Net operating loss $ (657) 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 (Loss amounts should be indicated by a minus sign )

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Posted on Aug 16, 2024

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

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		690
Depreciation of aircraft		540
Fuel for aircraft		185
Liability insurance		270
Salaries, flight assistants		680
Baggage loading and flight preparation		200
Overnight costs for flight crew and assistants at destination		60

Total flight expenses		2,945

Net operating loss	$	(657)

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. (Loss amounts should be indicated by a minus sign.)