Special Order

Flying High Airlines needs a special order of 500,000 gallons of jet fuel from Energy Source, a local supplier which Flying High usually does not do business with. Due to winter weather and poor travel conditions, Flying Highs regular shipment of fuel did not arrive. Flying High usually pays $4.50 per gallon under contract with their regular supplier and is not willing to pay Energy Source any more than that. Energy Source is a smaller producer and usually charges $5.25 per gallon. The companys budgeted income statement for the year is as follows:

Sales (1,130,000 gallons) $5,932,500

Variable COGS $3,107,500

Variable Selling & Administrative $565,000

Contribution Margin $2,260,000

Fixed Manufacturing Costs $1,300,000

Fixed Selling & Administrative $850,000

Net Income $110,000

How would accepting this order from Flying High affect Energy Sources net income?

Add/Drop

Profits have been decreasing for several years at Flying High 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:

Revenue/Expense	$	%
Ticket revenue (180 seats 40% occupancy $195 ticket price)	$14,040	100%
Variable expenses ($13 per person)	$936	6.7%
Contribution margin	$13,104	93.3%
Flight expenses:
Salaries, flight crew	$1,680
Flight promotion	$680
Depreciation of aircraft	$1,370
Fuel for aircraft	$5,790
Liability insurance	$4,290
Salaries, flight assistants	$1,400
Baggage loading and flight preparation	$1,520
Overnight costs for flight crew and assistants at destination	$220
Total flight expenses	$16,950
Net operating loss	$(3,846)

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 companys total baggage loading and flight preparation expenses.

d. If flight 482 is dropped, Flying High 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 Flying High Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

By how much will the profits increase or decrease if flight 482 is discontinued?