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 such flight (Flight 482) follows: Ticket revenue (175 seats × 40% occupancy × $400 ticket price) $ 28,000 100.0% Less: Variable expenses ($15 per person) 2,100 7.5 Contribution margin 25,900 92.5% Less: Flight expenses: Salaries, flight crew 3,600 Flight promotion 1,500 Depreciation of aircraf
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 such flight (Flight 482) follows:
Ticket revenue (175 seats × 40% occupancy × $400 ticket price) $ 28,000 100.0%
Less: Variable expenses ($15 per person) 2,100 7.5
Contribution margin 25,900 92.5%
Less: Flight expenses:
Salaries, flight crew 3,600
Flight promotion 1,500
Fuel for aircraft 13,600
Liability insurance 8,400
Salaries, flight attendants 1,000
Baggage loading and flight preparation 3,400
Overnight costs for flight crew and attendants at destination 600
Total flight expenses 35,200
Net operating loss $ (9,300)
The following additional information is available about Flight 482:
a. Members of the flight crew are paid fixed annual salaries, whereas the flight attendants are paid by the
flight.
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 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 crew’s 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. Depreciation of aircraft 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:
1. Prepare an analysis showing what impact dropping Flight 482 would have on the airline’s profits.
2. The airline’s scheduling officer has been criticized because only about 50% of the seats on Pegasus’s
flights are being filled, compared with an average of 60% for the industry. The scheduling officer has
explained that Pegasus’s average seat occupancy could be improved considerably by eliminating about
10% of the flights, but that doing so would reduce profits. Explain how this could happen.
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