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 (165 seats x 40% occupancy x $220 ticket price) $ 14,520 Variable expenses ($17.00 per person) 1,122 Contribution margin Flight expenses: Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination Total flight expenses Net operating loss 13,398 $ 1,600 760 1,500 5,100 5,400 1,300 1,850 600 18,110 $ (4,712 ) 100.0 % 7.7 92.3 % 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. Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482? 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 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.
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 (165 seats x 40% occupancy x $220 ticket price) $ 14,520 Variable expenses ($17.00 per person) 1,122 Contribution margin Flight expenses: Salaries, flight crew Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight preparation Overnight costs for flight crew and assistants at destination Total flight expenses Net operating loss 13,398 $ 1,600 760 1,500 5,100 5,400 1,300 1,850 600 18,110 $ (4,712 ) 100.0 % 7.7 92.3 % 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. Required: 1. What is the financial advantage (disadvantage) of discontinuing flight 482? 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 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
H11.
Account
Transcribed Image Text: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 (165 seats x 40% occupancy x $220 ticket price) $ 14,520
Variable expenses ($17.00 per person)
1,122
Contribution margin
13,398
Flight expenses:
Salaries, flight crew
Flight promotion
Depreciation of aircraft
Fuel for aircraft
Liability insurance
Salaries, flight assistants
Baggage loading and flight preparation
Overnight costs for flight crew and assistants at destination
Total flight expenses
Net operating loss
$ 1,600
760
1,500
5,100
5,400
1,300
1,850
600
18,110
$ (4,712 )
100.0 %
7.7
92.3 %
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.
Required:
1. What is the financial advantage (disadvantage) of discontinuing flight 482?
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.
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