4 Problem 12-21 Dropping or Retaining a Flight [LO12-2] 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 points A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (100 seats( 40% 2,800 occupancy x $70 ticket price) Print 100% Variable expenses ($11.00 per person 440 15.7 Contribution margin Flight expenses: 2,360 84.3% $ 360 750 520 190 210 740 Salaries, flight creww Flight promotion Depreciation of aircraft Fuel for aircraft Liability insurance Salaries, flight assistants Baggage loading and flight 190 Overnight costs for flight crew and assistants at destination 70 3,030 $(670) Total flight expenses Net operating loss 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 e. Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and f. Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft with another flight tear is negligible. 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. (Any losses/ reductions should be indicated by a minus sign.) Contribution margin lost if the tour is discontinued Less flight costs that can be avoided if the flight is discontinued: Flight promotion Fuel for aircraft Liability insurance Salaries, flight assistants Overnight costs for fight crew and assistants Net increase (decrease) in profits if the flight is discontinued