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 such flight (Flight 482) follows The following additional information is available about Flight 482 Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the flight One third of the liability insurance is a special charge assessed against Flight 482 because, in the opinion of the insurance company, the destination 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 Depreciation of aircraft 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 Prepare an analysis showing what impact dropping Flight 482 would have on the airlines profits (Do not round intermediate calculations Negative amounts should be indicated with a minus sign ) $ 25,000 2,000 23,000 100 0 8 0 92 0 Ticket revenue (125 seats x 80 occupancy $250 ticket price) Less Variable expenses ($20 per person) Contribution margin Less Flight expenses Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight attendants Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination Total flight expenses Net operating loss 3, 100 1,250 2,500 12,000 7,500 900 3,000 500 30, 750 $(7,750)

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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 such flight (Flight 482) follows:

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The following additional information is available about Flight 482:

Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the flight.
One-third of the liability insurance is a special charge assessed against Flight 482 because, in the opinion of the insurance company, the destination 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.
Depreciation of aircraft 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. Prepare an analysis showing what impact dropping Flight 482 would have on the airlines profits. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)

$ 25,000 2,000 23,000 100.0% 8.0 92.0% Ticket revenue (125 seats x 80% occupancy * $250 ticket price) Less: Variable expenses ($20 per person) Contribution margin Less: Flight expenses: Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight attendants Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination Total flight expenses Net operating loss 3, 100 1,250 2,500 12,000 7,500 900 3,000 500 30, 750 $(7,750)