Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 20 percent. Segmented income statements for a typical month appear as follows (all amounts in millions of dollars): Routes Within U.S. Within Europe Between U.S. and Europe Sales $ 3.23 $ 2.84 $ 2.89 Variable costs 1.25 0.98 1.78 Fixed costs allocated to routes 1.66 1.30 1.40 Operating profit (loss) $ 0.32 $ 0.56 $ (0.29 ) Required: a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect. Enter your answers in millions rounded to 2 decimal places.)
Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 20 percent.
Segmented income statements for a typical month appear as follows (all amounts in millions of dollars):
| Routes | Within U.S. | Within Europe | Between U.S. and Europe |
||||||||
| Sales | $ | 3.23 | $ | 2.84 | $ | 2.89 | |||||
| Variable costs | 1.25 | 0.98 | 1.78 | ||||||||
| Fixed costs allocated to routes | 1.66 | 1.30 | 1.40 | ||||||||
| Operating |
$ | 0.32 | $ | 0.56 | $ | (0.29 | ) | ||||
Required:
a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect. Enter your answers in millions rounded to 2 decimal places.)
The division may be incurring losses on individual level but on whole it may be providing benefit to the organization. It happens due to excess of contribution margin provided by the division with respect to avoidable fixed costs related to the division.
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