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 $200 ticket price) $ 14,000 100.0% Variable expenses ($15 per person). 7.5 Contribution margin 1,050 12,950 92.5% Flight expenses: Salaries, flight crew Flight promotion. $ 1,800 750 1,550 Depreciation of aircraft Fuel for aircraft 5,800 Liability insurance 4,200 Salaries, flight assistants 1,500 Baggage loading and flight preparation 1,700 Overnight costs for flight crew and i assistants at destination 300 Total flight expenses 17,600 Net operating loss $ (4,650) 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 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. c. 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. 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 is negligible. 4 4:25 7 Answer 1 of 1 Done Answer - Financial disadvantage of discontinuing flight 482 = $3,200. It means if Pegasus Airlines discontinues flight 482, it will loose net income of $3,200. Explanation:- Particulars Amount (S) Amount (S) Contribution margin lost if flight discontinued (12,950) Avoidable fixed expenses Flight assistant salaries 1,500 Liability insurance: (4,200 1/3) 1,400 Flight promotion 750 Fuel: 5,800 Overnight costs 300 9,750 Incremental income/ (Loss) if flight 482 (3,200) is dropped all
