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 (170 seats × 40% occupancy × $220 ticket price) $ 14,960 100.0 % Variable expenses ($15.00 per person) 1,020 6.8 Contribution margin 13,940 93.2 % Flight expenses: Salaries, flight crew $ 1,500 Flight promotion 790 Depreciation of aircraft 1,650 Fuel for aircraft 5,300 Liability insurance 4,800 Salaries, flight assistants 1,400 Baggage loading and flight preparation 1,900 Overnight costs for flight crew and assistants at destination 600 Total flight expenses 17,940 Net operating loss $ (4,000 ) 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 48

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 (170 seats × 40% occupancy × $220 ticket price) $ 14,960 100.0 % Variable expenses ($15.00 per person) 1,020 6.8 Contribution margin 13,940 93.2 % Flight expenses: Salaries, flight crew $ 1,500 Flight promotion 790 Depreciation of aircraft 1,650 Fuel for aircraft 5,300 Liability insurance 4,800 Salaries, flight assistants 1,400 Baggage loading and flight preparation 1,900 Overnight costs for flight crew and assistants at destination 600 Total flight expenses 17,940 Net operating loss $ (4,000 ) 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 48

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

A typical income statement for one round-trip of one such flight (flight 482) is as follows:


Ticket revenue (170 seats × 40% occupancy × $220 ticket price)	$	14,960		100.0	%
Variable expenses ($15.00 per person)		1,020		6.8
Contribution margin		13,940		93.2	%
Flight expenses:
Salaries, flight crew	$	1,500
Flight promotion		790
Depreciation of aircraft		1,650
Fuel for aircraft		5,300
Liability insurance		4,800
Salaries, flight assistants		1,400
Baggage loading and flight preparation		1,900
Overnight costs for flight crew and assistants at destination		600
Total flight expenses		17,940
Net operating loss	$	(4,000	)

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.