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.

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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

Problem 1Q

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The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below: Sales Variable expenses Fixed manufacturing expenses Fixed selling and administrative expenses All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $179,000 of the fixed manufacturing expenses and $155,200 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued. Required: What would be the financial advantage (disadvantage) of dropping B90D? Should the product be dropped? Net operating income (loss) would $ 745,000 $ 387,000 $ 253,400 $216,200 decline increase by if product B90D were dropped. Therefore, the product dropped
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A manufacturer is considering eliminating a segment because it shows the following $6,300 loss. All $21,100 of its variable costs are avoidable, and $38,500 of its fixed costs are avoidable. Segment Income (Loss) Sales Variable costs Contribution margin Fixed costs Income (loss) (a) Compute the income increase or decrease from eliminating this segment. (b) Should the segment be eliminated? Complete this question by entering your answers in the tabs below. Required A $ 63,300 21,100 42,200 48,500 (6,300) Required B Compute the incomo
5 In an effort to increase profits, Pegasus Airlines 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 (175 seats x 40% occupancy × $200 ticket price). Variable expenses ($15 per person) 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 $ 14,000 1,050 12,950 $ 1,800 750 1,550 5,800 4,200 1,500 1,700 300 17,600 $ (4,650) 100.0% 7.5 92.5% 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 paid based on the number of round trips they complete. b. One-third of the liability insurance is a…
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