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N QUESTION TWO Profits have been decreasing for several years at Paramount Airways. In an effort to improve the company's performance, consideration is being given to getting rid of several flights that appear to be unprofitable. A typical income statement for one such flight (PA 007) is given below (per flight): Particulars Amount ($) Amount ($) Percentage Ticket revenue (175 seats x 40% occupancy x $200 ticket price) 14,000 100.0% Less: Variable expenses ($15 per person) 1,050 7.5% Contribution margin 12,950 92.5% Less: Flight expenses (Please note that these include variable and fixed costs. Further details are provided in the additional information below) Salaries of pilots 1,800 Flight promotion 750 Depreciation of aircraft 1,550 Fuel for aircraft 6,800 Liability insurance 4,200 Salaries of cabin crew 500 Baggage loading and flight preparation 1,700 Overnight costs for flight crew and flight 300 assistants Total flight expenses 17,600 Net operating profit / (loss) (4,650) The following additional information is available about flight PA 007: (1) Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid by the flight. (ii) One-third of the liability insurance is a special charge for flight PA 007 because in the opinion of the insurance company, the destination of the flight is a 'high-risk' area. The remaining two-thirds would be unaffected by a decision to drop flight PA 007. (iii) The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of ground equipment. Dropping flight PA 007 would have no effect on the company's total baggage loading and flight preparation expenses. (iv) if flight PA 007 is dropped, Paramount Airways has no authorisation at present to replace it with another flight (v) Depreciation of aircraft is due entirely to obsolescence. Depreciation due to wear and tear is negligible. (vi) Getting rid of flight PA 007 would not allow Paramount Airways to reduce the number of aircraft in its fleet or the number of flight crew on its payroll

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