### Pegasus Airlines Financial Analysis Case Study#### IntroductionPegasus Airlines has been experiencing declining profits over the past several years. To enhance its performance, the company is contemplating the cessation of several unprofitable flights. Below is an example of an income statement for one such round-trip flight (Flight 482).#### Income Statement for Flight 482| **Income and Expenses** | Amount ||------------------------------------------------|----------|| **Ticket revenue (175 seats x 40% occupancy x $200 ticket price)** | **$14,000** || Variable expenses ($15 per person) | 1,050 || **Contribution margin** | **12,950** || **Flight expenses:** | || - Salaries, flight crew | 1,800 || - Flight promotion | 750 || - Depreciation of aircraft | 1,500 || - Fuel for aircraft | 5,800 || - Liability insurance | 4,200 || - Salaries, flight assistants | 1,500 || - Baggage loading & flight preparation | 1,700 || - **Overnight costs for flight crew & assistants at destination** | **300** || **Total flight expenses** | **17,550** || **Net operating loss** | **($4,650)** |#### Additional Information About Flight 482a. Flight crew members receive fixed annual salaries, while flight assistants are paid based on the number of round trips completed.b. One-third of the liability insurance is a special charge due to the high-risk destination of Flight 482. The remaining two-thirds are unaffected by discontinuing the flight.c. The baggage loading and flight preparation expenses are allocated and would not diminish if Flight 482 is dropped.d. Pegasus Airlines does not have authorization to replace Flight 482 with another flight if it is discontinued.e. Aircraft depreciation is due to obsolescence and is unaffected by flight decisions.f. Discontinuing Flight 482 wouldn’t reduce the fleet size or the number of flight crew on payroll.#### Required Analysis1. **What is the financial advantage (disadvantage) of discontinuing flight 482?**To determine the financial impact of discontinuing Flight 482, the unrecoverable costs and the expenses saved by halting this flight need to be considered

To increase transparency with stakeholders and enable a more accurate assessment of the company's…

e 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. quired: What is the financial advantage (disadvantage) of discontinuing flight 482?

e 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. quired: What is the financial advantage (disadvantage) of discontinuing flight 482?

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter5: Risk Analysis

Section: Chapter Questions

Problem 18PC

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