Problem-solving 2: Dropping or Retaining a FlightProfits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company'sperformance, consideration is being given to 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 (175 seats x 40% occupancy x$200 ticket price)......Variable expenses ($15 per person).Contribution marginFlight expenses:Salaries, flight crew..Flight promotion.Depreciation of aircraftFuel for aircraftLiability insurance.Salaries, flight assistants.Baggage loading and flight preparationOvernight costs for flight crew and assistants atdestination....Total flight expenses..Net operating loss..$14,0001,05012,9501,8007501,5505,8004,2001,5001,70030017,600$ (4,650)100.0%7.592.5%The following additional information is available about flight 482:a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paidbased on the number of round trips they complete.b. One-third of the liability insurance is a special charge assessed against flight 482 because in theopinion of the insurance company, the destination of the flight is in a "high-risk" area. Theremaining 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 crews' salaries anddepreciation of ground equipment. Dropping flight 482 would have no effect on the company'stotal 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. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear isnegligible.f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleetor 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'flights are being filled compared to an industry average of 60%. The scheduling officer has explainedthat Pegasus' average seat occupancy could be improved considerably by eliminating about 10% of itsflights, but that doing so would reduce profits. Explain how this could happen.

Answered: Image /qna-images/answer/185008bc-2173-4492-8ebb-bcf16ce21723.jpg

Answered: Required: 1. Prepare an analysis…

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 (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…
Lafayette Corp. is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $6,000. The division sales for the year were $1,044,000 and the variable costs were $863,000. The fixed costs of the division were $187,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be: Multiple Choice $181,000 decrease $181,000 increase $124,900 decrease $56,100 decrease $50,100 decrease
O’Neil Enterprises produces a line of canned soups for sale at supermarkets across the country. Demand has been “soft” recently and the company is operating at 70 percent of capacity. The company is considering dropping one of the soups, beef barley, in hopes of improving profitability. If beef barley is dropped, the revenue associated with it will be lost and the related variable costs saved. The CFO estimates that the fixed costs will also be reduced by 25 percent. The following product line statements are available. Product Broth Beef Barley Minestrone Sales $ 32,600 $ 42,800 $ 51,200 Variable costs 22,000 38,600 40,100 Contribution margin $ 10,600 $ 4,200 $ 11,100 Fixed costs allocated to each product line 4,700 6,000 7,100 Operating profit (loss) $ 5,900 $ (1,800 ) $ 4,000 Required: a-1. Complete the following differential cost schedule. a-2. From an operating profit perspective, should O'Neil…
44. JetSky Airways has three divisions, the Western Division, the Eastern Division, and the Northern Division. The manager of the Western Division had wanted to purchase replacement airplanes for the division. However, he decided against it because, although revenues would increase and the new planes would be less expensive to operate, the initial cost of the planes was quite large. The Western Division is most probably accounted for as a(n) * cost center. None of these. O revenue center. investment center. profit center.
Sanra company is considering eliminating its mountain bike division, which reported an operating loss for the recent year of 3,000. The division sales for the year were 1,050,000 and the variable costs were 860,000. The fixed costs of the division were 193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be: a.57,900 decrease b.132,100 decrease c.54,900 decrease d.190,000 increase e.190,000 decrease
Members of the board of directors of Safety Place have received the following operating income data for the year ended May 31, 2018: (Click the icon to view the operating income data.) Members of the board are surprised that the industrial systems product line is not profitable. They commission a study to determine whether the company should drop the line. Company accountants estimate that dropping industrial systems will decrease fixed cost of goods sold by $80,000 and decrease fixed selling and administrative expenses by $10,000. Read the requirements. Requirement 1. Prepare a differential analysis to show whether Safety Place should drop the industrial systems product line. (Use parentheses or a minus sign to enter decreases to profits.) in operating income
Two alternative locations are under consideration for a new plant: Jackson, Mississippi, and Dayton, Ohio. The Jackson location is superior in terms of costs. However, management believes that sales volume would decline if this location were chosen because it is farther from the market, and the firm's customers prefer local suppliers. The selling price of the product is $375 per unit in either case. Use the following information to determine which location yields the higher total profit per year: Location Jackson Dayton Annual Fixed Cost $2,100,000 $3,000,000 Variable Cost per Unit $45 $80 Forecasted Demand per Year 40,000 units 39,000 units The annual profit from Jackson is $8575000. (Enter your response as an integer.)
Devern Assurance Company provides both property and automobile insurance. The projectedincome statements for the two products are as follows: The president of the company is considering dropping the property insurance. However, somepolicyholders prefer having their property and automobile insurance with the same company, so if property insurance is dropped, sales of automobile insurance will drop by 12 percent. No sig-nificant non-unit-level activity costs are incurred. Required:1. If Devern Assurance Company drops property insurance, by how much will income increaseor decrease? Provide supporting computations. 2. Assume that dropping all advertising for the property insurance line and increasing the cor-porate advertising budget by $450,000 will increase sales of property insurance by 10 percent and automobile insurance by 8 percent. Prepare a segmented income statement that reflectsthe effect of increased advertising. Should advertising be increased?
A payday loan company has decided to open several new locations in a city and hires consultants to decide where to open these locations. The consultants are paid per store that is opened, and at the end of the quarter, the company notices a many of the new stores' sales volume fail to meet expectations. To incentivize the consultants to instead focus on opening profitable stores, the company decided to alter the compensation to a percentage of the profit earned per new store. This puts the consultants_ and the payday loan company should expect to compensate for this change. to Group of answer choices 1. In a less risky position; pay the consultants more than they would in the per- store scheme 2. A more risky position; pay the consultants less than they would in the per- store scheme 3. In a less risky position; pay the consultants less than they would in the per- store scheme 4. A more risky position; pay the consultants more than they would in the per- store scheme

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