Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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:

Ticket revenue (150 seats 80% occupancy $475 ticket price) $ 57,000 100.0 %
Less: Variable expenses ($38 per person) 4,560 8.0
Contribution margin 52,440 92.0 %
Less: Flight expenses:
Salaries, flight crew 7,100
Flight promotion 2,850
Depreciation of aircraft 5,700
Fuel for aircraft 27,300
Liability insurance 17,100
Salaries, flight attendants 2,000
Baggage loading and flight preparation 6,850
Overnight costs for flight crew and attendants at destination 1,140
Total flight expenses 70,040
Net operating loss $ (17,600 )

The following additional information is available about Flight 482:
a.

Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the flight.

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 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 companys 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. Depreciation of aircraft 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 airlines profits. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Trade Based Money Laundering

Authors: John A. Cassara

1st Edition

1119078954, 9781119078951

More Books

Students also viewed these Accounting questions