Continue or Discontinue: For making decision about continuing or discontinuing a flight, we need to know the impact of that flight on the overall profits of the firm. So when overall operating profits are higher in case of continuing a flight then we will continue with the flight or vice versa. To identify: Financial advantage (disadvantage) of discontinuing flight 482.

Question

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 (175 seats x 40% occupancy x $220 ticket price) Variable expenses ($18.00 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 $ 15,400 1,260 100.0% 8.2 14,140 91.8% $ 1,600 770 1,650 5,700 5,100 1,400 1,850 800 18,870 $ (4,730) 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…

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Question

Chapter 11, Problem 21P

Requirement - 1:

To determine

Continue or Discontinue: For making decision about continuing or discontinuing a flight, we need to know the impact of that flight on the overall profits of the firm. So when overall operating profits are higher in case of continuing a flight then we will continue with the flight or vice versa.

To identify: Financial advantage (disadvantage) of discontinuing flight 482.

Requirement - 2:

To determine

To Explain: Impact of elimination of 10% its’ flight on profits.

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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 (175 seats x 40% occupancy x $220 ticket price) Variable expenses ($18.00 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 $ 15,400 1,260 100.0% 8.2 14,140 91.8% $ 1,600 770 1,650 5,700 5,100 1,400 1,850 800 18,870 $ (4,730) 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…

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 × 40% occupancy × $230 ticket price) $ 15,180 100.0 % Variable expenses ($17.00 per person) 1,122 7.4 Contribution margin 14,058 92.6 % Flight expenses: Salaries, flight crew $ 1,900 Flight promotion 790 Depreciation of aircraft 1,550 Fuel for aircraft 5,500 Liability insurance 5,100 Salaries, flight assistants 1,400 Baggage loading and flight preparation 1,900 Overnight costs for flight crew and assistants at destination 800 Total flight expenses 18,940 Net operating loss $ (4,882 ) The…

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 × 40% occupancy × $220 ticket price)$ 14,520100.0%Variable expenses ($20.00 per person)1,3209.1Contribution margin13,20090.9%Flight expenses: Salaries, flight crew$ 1,800 Flight promotion760 Depreciation of aircraft1,800 Fuel for aircraft5,400 Liability insurance5,100 Salaries, flight assistants1,200 Baggage loading and flight preparation1,750 Overnight costs for flight crew and assistants at destination700 Total flight expenses18,510 Net operating loss$ (5,310) 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…