Reference no: EM132517235
Apollo Air is suffering from declining profits & is therefore considering cancelling several flights. One specific flight (AA231) is as follows:
Ticket revenue (250 seats sold X 40% occupancy X $400/ticket) $40,000
Less: Variable Costs ($35/ticket) $8,750
Contribution margin $31,250
Less: Flight expenses
Salaries: Pilots $4,200
Aircraft Fuel $18,000
Insurance, Liability $5,200
Salaries: Flight Attendants $3,000
Baggage and ground crew fees $5,000
Amortization of airplane $1,500
Total Flight expenses $36,900
Net operating loss ($5,650)
The following additional information is available about flight AA231
- Pilots are paid on salary, while flight attendants are paid by the flight
- Dropping flight AA231 would not result in reducing the overall number of aircraft
- Aircraft amortization is based on obsolesce and not due to wear and tear
- Liability insurance is 50% related to this specific flight & 50% is allocated based on a general corporate policy.
- If the flight is dropped there is no ability to replace it with another flight
- Baggage fees are allocated based on airport and would still be paid regardless of this flight
Required:
Question 1. Show an analysis showing what impact dropping flight AA231 would have on Apollo Airs profit. Provide a recommendation as to whether or not they should continue the flight