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 x 80% occupancy x $500 ticket price) Less: Variable expenses ($40 per person) Contribution margin Less: Flight expenses: Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight attendants Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination Total flight expenses Net operating loss The following additional information is available about Flight 482 $ 70,000 100.0% 5,600 8.0 64,400 92.0% 8,750 3,500 7,000 33,600 Flir Lants that anak 21,000 2,450 8,400 1,400 86,100 $(21,700) 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. 1. Dropping Flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flight crew on In payroll. Required: 1. Prepare an analysis showing what impact dropping Flight 482 would have on the airline's profits. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Salaries, flight attendants
Baggage loading and flight preparation
Overnight costs for flight crew and attendants at destination
Total flight expenses
Net operating loss
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.
Flight costs that can be avoided if the flight is discontinued:
Required:
1. Prepare an analysis showing what impact dropping Flight 482 would have on the airline's profits. (Do not round intermediate
calculations. Negative amounts should be indicated with a minus sign.)
Show Transcribed Text
Ticket revenue (175 seats x 80% occupancy x $500 ticket price)
Less: Variable expenses ($40 per person)
Contribution margin
Less: Flight expenses:
Salaries, flight crew.
Flight promotion
Depreciation of aircraft
Fuel for aircraft
Liability insurance
Salaries, flight attendants
3
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:
Baggage loading and flight preparation
Overnight costs for flight crew and attendants at destination
Total flight expenses
Net operating loss
The following additional information is available about Flight 482:
2,450
8,400
1,400
Ć
86,100
$ (21,700)
$
Contribution marin nained if the flinht ie dierontinuad
O
0
$ 70,000
5,600
64,400
8,750
3,500
7,000
33,600
21,000
2,450
8,400
1,400
86,100
$(21,700)
100.0%
8.0
92.0%
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.
1. 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. (Do not round intermediate
calculations. Negative amounts should be indicated with a minus sign.)
Transcribed Image Text:Salaries, flight attendants Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination Total flight expenses Net operating loss 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. Flight costs that can be avoided if the flight is discontinued: Required: 1. Prepare an analysis showing what impact dropping Flight 482 would have on the airline's profits. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.) Show Transcribed Text Ticket revenue (175 seats x 80% occupancy x $500 ticket price) Less: Variable expenses ($40 per person) Contribution margin Less: Flight expenses: Salaries, flight crew. Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight attendants 3 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: Baggage loading and flight preparation Overnight costs for flight crew and attendants at destination Total flight expenses Net operating loss The following additional information is available about Flight 482: 2,450 8,400 1,400 Ć 86,100 $ (21,700) $ Contribution marin nained if the flinht ie dierontinuad O 0 $ 70,000 5,600 64,400 8,750 3,500 7,000 33,600 21,000 2,450 8,400 1,400 86,100 $(21,700) 100.0% 8.0 92.0% 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. 1. 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. (Do not round intermediate calculations. Negative amounts should be indicated with a minus sign.)
"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managing
director of Antilles Refining, N.V., of Aruba. "At a price of 150 florins per drum, we would be paying 10 florins less than it costs us to
manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Afl.) Since we use 400,000 drums a year, we
would save 4,000,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 400,000
drums per year):
Direct material
Direct labour
Variable overhead
Fixed overhead (Af124.60 general company overhead, Af122.20
depreciation and, Af120.50 supervision)
Total cost per drum
A decision about whether to make or buy the drums is especially important at this time, since the equipment being used to make the
drums is completely worn out and must be replaced. The choices facing the company are as follows:
Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost Af15,400,000; it would have
a five-year useful life and no salvage value. The company uses straight-line depreciation.
. Alternative 2: Purchase the drums from an outside supplier at Afl150 per drum under a five-year contract.
The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the
manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision
cost (Afl8,200,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's
capacity would be 8,200,000 drums per year. The company has no other use for the space being used to produce the drums.
The company's total general company overhead would be unaffected by this decision.
Outside supplier's price
Direct materials
Direct labour
Variable overhead
Required:
1-a. Calculate the total costs and costs per drum under the two alternatives. Assume that 400,000 drums are needed each year.
(Round "Cost Per Drum" answers to 2 decimal places.)
Supervision
Depreciation
Total cost
Differential Costs Per Drum
Make
Buy
Afl
Afl
Afl 39.70
31.00
22.00
Afl
67.30
Af1160.00
0.00 Afl
Afl
Total Differential Costs-400,000 Drums
Make
0.00 Afl
Afl
0 Afl
Buy
0
Transcribed Image Text:"In my opinion, we ought to stop making our own drums and accept that outside supplier's offer," said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. "At a price of 150 florins per drum, we would be paying 10 florins less than it costs us to manufacture the drums in our own plant. (The currency in Aruba is the florin, denoted by Afl.) Since we use 400,000 drums a year, we would save 4,000,000 florins on an annual basis." Antilles Refining's present cost to manufacture one drum follows (based on 400,000 drums per year): Direct material Direct labour Variable overhead Fixed overhead (Af124.60 general company overhead, Af122.20 depreciation and, Af120.50 supervision) Total cost per drum A decision about whether to make or buy the drums is especially important at this time, since the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are as follows: Alternative 1: Purchase new equipment and continue to make the drums. The equipment would cost Af15,400,000; it would have a five-year useful life and no salvage value. The company uses straight-line depreciation. . Alternative 2: Purchase the drums from an outside supplier at Afl150 per drum under a five-year contract. The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labour and variable overhead costs by 30%. The old equipment has no resale value. Supervision cost (Afl8,200,000 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment's capacity would be 8,200,000 drums per year. The company has no other use for the space being used to produce the drums. The company's total general company overhead would be unaffected by this decision. Outside supplier's price Direct materials Direct labour Variable overhead Required: 1-a. Calculate the total costs and costs per drum under the two alternatives. Assume that 400,000 drums are needed each year. (Round "Cost Per Drum" answers to 2 decimal places.) Supervision Depreciation Total cost Differential Costs Per Drum Make Buy Afl Afl Afl 39.70 31.00 22.00 Afl 67.30 Af1160.00 0.00 Afl Afl Total Differential Costs-400,000 Drums Make 0.00 Afl Afl 0 Afl Buy 0
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