Profits have been decreasing for several years at Pegasus Ai

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.

Solution

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