Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...

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Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the...

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 such flight (Flight 482) follows:

business accounting

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Answer 1

Answer #1

Contribution margin lost if the tour is discontinued		$(23000)
Less: flight costs that can be avoided if the flight is discontinued:
Flight promotion	$1250
Fuel for Aircraft	12000
Liability Insurance	2500
Salaries, Flight Assistant	900
Overnight costs for flight crew and assistants	500	17150
Net increase (decrease)in profit if the flight is discontinued		$(5850)

Explanation:

The following costs are not relevant to the decision:

Cost	Reason
Salaries, flight crew	Fixed annual salaries, which will not change.
Depreciation of aircraft	Sunk cost.
Liability insurance (two-thirds)	Two-thirds of the liability insurance is unaffected by this decision
Baggage loading and flight preparation	This is an allocated cost that will continue even if the flight is discontinued.

Liability insurance (1/3 × $7500) = $2500

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Answer 2

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