Reference no: EM131665537

Problem - Dropping or Retaining a Flight

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's 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 (105 seats x 40% occupancy x S80 ticket price)	$ 3,360	100%
Variable expenses ($14.00 per person)	588	17.5
Contribution margin	2,772	82.5%

 

Flight expenses:
Salaries, flight crew	$300
Flight promotion	700
Depreciation of aircraft	440
Fuel for aircraft	175
Liability insurance	270
Salaries, flight assistants	720
Baggage loading and flight preparation	180
Overnight costs for flight crew and assistants at destination	70
Total flight expenses	2,855
Net operating loss	$(83)

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: Prepare an analysis showing what impact dropping flight 482 would have on the airline's profits. (Any losses/ reductions should be indicated by a minus sign.)