The following additionalinformation 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 roundtrips they complete.
b. One-third of the liability insurance is a special chargeassessed against flight 482 because in the opinion of the insurancecompany, the destination of the flight is in a "high-risk" area.The remaining two-thirds would be unaffected by a decision to dropflight 482.
c. The baggage loading and flight preparation expense is anallocation of ground crews' salaries and depreciation of groundequipment. Dropping flight 482 would have no effect on thecompany's total baggage loading and flight preparationexpenses.
d. If flight 482 is dropped, Pegasus Airlines has no authorizationat present to replace it with another flight.
e. Aircraft depreciation is due entirely to obsolescence.Depreciation due to wear and tear is negligible.
f. Dropping flight 482 would not allow Pegasus Airlines to reducethe number of aircraft in its fleet or the number of flight crew onits payroll.
Profits have been decreasing for several years at PegasusAirlines. In an effort to improve the companyâs performance,consideration is being given to dropping several flights thatappear to be unprofitable.
A typical income statement for oneround-trip of one such flight (flight 482) is as follows:
Ticket revenue (120 seats Ã40%
occupancy à $80 ticket price) $ 3,840 100 % Variable expenses($14.00 per person) 672 17.5 Contributionmargin 3,168 82.5 % Flightexpenses: Salaries, flight crew $ 400 Flight promotion 680 Depreciation of aircraft 420 Fuel for aircraft 170 Liability insurance 300 Salaries, flight assistants 700 Baggage loading and flightpreparation 185 Overnight costs for flight crew and assistants at destination 60 Total flightexpenses 2,915 Net operatingloss $ (253) Required: 1. Prepare an analysis showing what impact dropping flight 482would have on the airline's profits.
Profits have been decreasing for several years at PegasusAirlines. In an effort to improve the companyâs performance,consideration is being given to dropping several flights thatappear to be unprofitable. |
| A typical income statement for oneround-trip of one such flight (flight 482) is as follows:
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Related questions
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the companyâs 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 (115 seats à 40% occupancy à $60 ticket price) | $ | 2,760 | 100.0 | % | ||
| Variable expenses ($14.00 per person) | 644 | 23.3 | ||||
| Contribution margin | 2,116 | 76.7 | % | |||
| Flight expenses: | ||||||
| Salaries, flight crew | $ | 340 | ||||
| Flight promotion | 710 | |||||
| Depreciation of aircraft | 530 | |||||
| Fuel for aircraft | 200 | |||||
| Liability insurance | 210 | |||||
| Salaries, flight assistants | 680 | |||||
| Baggage loading and flight preparation | 185 | |||||
| Overnight costs for flight crew and assistants at destination | 70 | |||||
| Total flight expenses | 2,925 | |||||
| Net operating loss | $ | (809 | ) | |||
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 âhigh-riskâ 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 crewsâ salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on the companyâs 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 PegasusAirlines. In an effort to improve the companyâs performance,consideration is being given to dropping several flights thatappear to be unprofitable. |
| Atypical income statement for one round-trip of one such flight(flight 482) is as follows: |
| Ticket revenue (110seats à 40% occupancy à $65 ticket price) | $ | 2,860 | 100 | % |
| Variable expenses($13.00 per person) | 572 | 20 | ||
| Contributionmargin | 2,288 | 80 | % | |
| Flightexpenses: | ||||
| Salaries, flight crew | $ | 320 | ||
| Flight promotion | 680 | |||
| Depreciation of aircraft | 460 | |||
| Fuel for aircraft | 180 | |||
| Liability insurance | 240 | |||
| Salaries, flight assistants | 720 | |||
| Baggage loading and flightpreparation | 200 | |||
| Overnight costs for flight crew and assistants at destination | 80 | |||
| Total flightexpenses | 2,880 | |||
| Net operatingloss | $ | (592) | ||
| The following additionalinformation 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 roundtrips they complete. |
| b. | One-third of the liability insurance is a special chargeassessed against flight 482 because in the opinion of the insurancecompany, the destination of the flight is in a "high-risk" area.The remaining two-thirds would be unaffected by a decision to dropflight 482. |
| c. | The baggage loading and flight preparation expense is anallocation of ground crews' salaries and depreciation of groundequipment. Dropping flight 482 would have no effect on thecompany's total baggage loading and flight preparationexpenses. |
| d. | If flight 482 is dropped, Pegasus Airlines has no authorizationat present to replace it with another flight. |
| e. | Aircraft depreciation is due entirely to obsolescence.Depreciation due to wear and tear is negligible. |
| f. | Dropping flight 482 would not allow Pegasus Airlines to reducethe number of aircraft in its fleet or the number of flight crew onits payroll. |
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. | Prepare an analysis showing what impact dropping flight 482would have on the airline's profits. (Any losses/reductions should be indicated by a minus sign.)
Question 2:
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