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.
| 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
| 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) |

