Flying High Airlines needs a special order of 500,000 gallons of jet fuel from Energy Source, a local supplier which Flying High usually does not do business with. Due to winter weather and poor travel conditions, Flying High’s regular shipment of fuel did not arrive. Flying High usually pays $4.50 per gallon under contract with their regular supplier and is not willing to pay Energy Source any more than that. Energy Source is a smaller producer and usually charges $5.25 per gallon. The company’s budgeted income statement for the year is as follows:

Sales (1,130,000 gallons) $5,932,500

Variable COGS $3,107,500

Variable Selling & Administrative $565,000

Contribution Margin $2,260,000

Fixed Manufacturing Costs $1,300,000

Fixed Selling & Administrative $850,000

Net Income $110,000

How would accepting this order from Flying High affect Energy Source’s net income?

Add/Drop

Profits have been decreasing for several years at Flying High 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:

Revenue/Expense	$	%
Ticket revenue (180 seats × 40% occupancy × $195 ticket price)	$14,040	100%
Variable expenses ($13 per person)	$936	6.7%
Contribution margin	$13,104	93.3%
Flight expenses:
Salaries, flight crew	$1,680
Flight promotion	$680
Depreciation of aircraft	$1,370
Fuel for aircraft	$5,790
Liability insurance	$4,290
Salaries, flight assistants	$1,400
Baggage loading and flight preparation	$1,520
Overnight costs for flight crew and assistants at destination	$220
Total flight expenses	$16,950
Net operating loss	$(3,846)

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, Flying High 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 Flying High Airlines to reduce the number of aircraft in its fleet or the number of flight crew on its payroll.

By how much will the profits increase or decrease if flight 482 is discontinued?

Make/Buy

Flying High is holding discussions on whether or not it is beneficial for them to make their own delicious flight meals in house rather than purchase them from a supplier. They have found that they can purchase the meals for $4 per meal. The costs associated with preparing these meals in house are as follows:

Per Meal

Ingredients $2.25

Beverage $0.50

Labor $0.75

Packaging $0.40

Equipment $1.20

Storage $0.30

Delivery $0.15

Kitchen Manager’s Salary $0.90

TOTAL $6.45

Beverages do not come with the supplier’s meals so those would have to be purchased either way. The equipment to prepare the meals in house has not been purchased yet not has the kitchen staff been hired (including labor workers and managers). The meals and beverages must be stored and delivered at the cost of Flying High regardless of how they attain the meals.

It is more beneficial for Flying High to prepare the meals in house or to purchase them from a supplier? What is the cost difference per meal?

Answer rating: 100% (QA)

1 Approach In a decision to accept a special order only variable costs are relevant costs Fixed cost... View the full answer