Question

In: Accounting

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...

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 (185 seats × 40% occupancy × $230 ticket price) $ 17,020 100.0 %
Variable expenses ($17.00 per person) 1,258 7.4
Contribution margin 15,762 92.6 %
Flight expenses:
Salaries, flight crew $ 1,800
Flight promotion 800
Depreciation of aircraft 1,750
Fuel for aircraft 5,800
Liability insurance 5,100
Salaries, flight assistants 1,200
Baggage loading and flight preparation 1,850
Overnight costs for flight crew and assistants at destination 700
Total flight expenses 19,000
Net operating loss $ (3,238 )

The following additional information is available about flight 482:

  1. 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.

  2. 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.

  3. 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.

  4. If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.

  5. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.

  6. 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. What is the financial advantage (disadvantage) of discontinuing flight 482?

Solutions

Expert Solution


Related Solutions

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (175 seats × 40% occupancy × $220 ticket price) $ 15,400 100.0 % Variable expenses ($15.00 per person) 1,050 6.8 Contribution margin 14,350 93.2 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (200 seats × 40% occupancy × $200 ticket price) $ 16,000 100.0 % Variable expenses ($19.00 per person) 1,520 9.5 Contribution margin 14,480 90.5 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (180 seats × 40% occupancy × $250 ticket price) $ 18,000 100.0 % Variable expenses ($17.00 per person) 1,224 6.8 Contribution margin 16,776 93.2 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (165 seats × 40% occupancy × $240 ticket price) $ 15,840 100.0 % Variable expenses ($18.00 per person) 1,188 7.5 Contribution margin 14,652 92.5 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (175 seats × 40% occupancy × $210 ticket price) $ 14,700 100.0 % Variable expenses ($19.00 per person) 1,330 9 Contribution margin 13,370 91 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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. An income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (175 seats × 40% occupancy × $200 ticket price) $14,000 100.0% Variable expenses ($15 per person) 1,050 7.5 Contribution margin 12,950 92.5% Flight expenses: Salaries, flight crew $ 1,800 Flight promotion 750...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (110 seats × 40% occupancy × $60 ticket price) $ 2,640 100.0 % Variable expenses ($11.00 per person) 484 18.3 Contribution margin 2,156 81.7 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (200 seats × 40% occupancy × $210 ticket price) $ 16,800 100.0 % Variable expenses ($15.00 per person) 1,200 7.1 Contribution margin 15,600 92.9 % Flight expenses: Salaries, flight crew $...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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(175 seats x 40% occupancy x $200 ticket price $14000 100% variable expenses 1050 7.5 Contribution margin 12950 92.5% flight expenses; salaries, flight crew 1800 flight promotion 750 depreciation of aircraft 1550...
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
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 (110 seats × 40% occupancy × $75 ticket price) $ 3,300 100.0 % Variable expenses ($10.00 per person) 440 13.3 Contribution margin 2,860 86.7 % Flight expenses: Salaries, flight crew $...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT