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 (195 seats × 40% occupancy × $200 ticket price) $ 15,600     100.0 % Variable expenses ($20.00 per person)   1,560     10   Contribution margin   14,040     90 % Flight expenses:             Salaries, flight crew $ 1,800         Flight promotion   770         Depreciation of aircraft   1,550         Fuel for aircraft   5,800         Liability insurance   5,100         Salaries, flight assistants   1,300         Baggage loading and flight preparation   1,850         Overnight costs for flight crew and assistants at destination   600         Total flight expenses   18,770         Net operating loss $ (4,730 )           The 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.   Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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 (195 seats × 40% occupancy × $200 ticket price) $ 15,600     100.0 %
Variable expenses ($20.00 per person)   1,560     10  
Contribution margin   14,040     90 %
Flight expenses:            
Salaries, flight crew $ 1,800        
Flight promotion   770        
Depreciation of aircraft   1,550        
Fuel for aircraft   5,800        
Liability insurance   5,100        
Salaries, flight assistants   1,300        
Baggage loading and flight preparation   1,850        
Overnight costs for flight crew and assistants at destination   600        
Total flight expenses   18,770        
Net operating loss $ (4,730 )      
 

 

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?

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