Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, 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 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 1,050 100.0% 7.5 12,950 92.5% 1,800 750 1,550 5,800 4,200 1,500 1,700 300 17,600 $ (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. f. 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. 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 explained that Pegasus' average seat occupancy could be improved considerably by eliminating about 10% of its flights, but that doing so would reduce profits. Explain how this could happen. Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, 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 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 1,050 100.0% 7.5 12,950 92.5% 1,800 750 1,550 5,800 4,200 1,500 1,700 300 17,600 $ (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. f. 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. 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 explained that Pegasus' average seat occupancy could be improved considerably by eliminating about 10% of its flights, but that doing so would reduce profits. Explain how this could happen.
Expert Answer:
Answer rating: 100% (QA)
1 Impact of Dropping Flight 482 on Airlines Profits Dropping flight 482 would result in a net operat... View the full answer
Posted Date:
Students also viewed these accounting questions
-
In Exercises 1318, find the average rate of change of the function from x 1 to x 2 . f(x) = 3x from x 0 to x = 5
-
A tissue manufacturer that has the fourth-largest market share plans to experiment with a 50 off coupon during November and a buy one, get one free coupon during December. The experiment will take...
-
What types of relevant evidence are excluded based on policy reasons? What are the policy reasons behind excluding such evidence?
-
Shannons physician gives her some pain medication and tells her not to drive after she takes it, as the medication induces drowsiness. In spite of the doctors warning, Shannon decides to drive to the...
-
Refer to point 1 entitled "repair of damaged harbour wall". Discuss how the R132 million would be recognised in the financial statements of SSSS as at 30 September 2012. You should apply the relevant...
-
Mr. Fran Finalize, office managing partner of Finalize & Associates Inc. has asked you to research the following question: Are there any circumstances when cash and cash equivalents held by a...
-
What is the ordering cost and what is the carrying cost? Illustrate how they are related on a graph.
-
Does it seem odd that ROI can have several limitations and it is the basis for prioritizing projects in Figure 9.2? Why or why not? Expected Project ROI 30% 20% 10% MARR Floor $10M Investment Ceiling...
-
A wire \(0.70 \mathrm{~m}\) long carries a current of \(1.4 \mathrm{~A}\). The wire is at an angle of \(53^{\circ}\) to a uniform external magnetic field. If the magnitude of the force the field...
-
Discuss the differences between fraud and abuse. During your discussion, provide examples of each and how health care managers might deal with them.
-
Why is emotional intelligence (EI) important for health care managers? Identify three ways someone who is new to the field can assess and develop his or her EI quotient.
Study smarter with the SolutionInn App