Reference no: EM132598236
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about 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 (170 seats × 40% occupancy × $240 ticket price) $16,320 100.0%
Variable expenses ($18.00 per person) 1,224 7.5
Contribution margin 15,096 92.5%
Flight expenses:
Salaries, flight crew $2,000
Flight promotion 780
Depreciation of aircraft 1,600
Fuel for aircraft 6,000
Liability insurance 5,400
Salaries, flight assistants 1,200
Baggage loading and flight preparation 1,800
Overnight costs for flight crew and assistants at destination 600
Total flight expenses 19,380 Net operating loss $(4,284)
The following additional information is available about flight 482:
- 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.
- 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.
- 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.
- If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
- Aircraft depreciation 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:
Question 1. What is the financial advantage (disadvantage) of discontinuing flight 482?