Profits have been decreasing for several years at PegasusAirlines. In an effort to improve the company’s performance,consideration is being given to dropping several flights thatappear to be unprofitable. A typical income statement for oneround-trip of one such flight (flight 482) is as follows: Ticketrevenue (105 seats × 40% occupancy × $65 ticket price) $ 2,730100.0 % Variable expenses ($15.00 per person) 630 23.1 % (rounded)Contribution margin 2,100 76.9 % (rounded) Flight expenses:Salaries, flight crew $ 300 Flight promotion 660 Depreciation ofaircraft 370 Fuel for aircraft 165 Liability insurance 150Salaries, flight assistants 720 Baggage loading and flightpreparation 175 Overnight costs for flight crew and assistants atdestination 70 Total flight expenses 2,610 Net operating loss $(510) The following additional information is available aboutflight 482: a. Members of the flight crew are paid fixed annualsalaries, whereas the flight assistants are paid based on thenumber of round trips they complete. b. One-third of the liabilityinsurance is a special charge assessed against flight 482 becausein the opinion of the insurance company, the destination of theflight is in a "high-risk" area. The remaining two-thirds would beunaffected by a decision to drop flight 482. c. The baggage loadingand flight preparation expense is an allocation of ground crews'salaries and depreciation of ground equipment. Dropping flight 482would have no effect on the company's total baggage loading andflight preparation expenses. d. If flight 482 is dropped, PegasusAirlines has no authorization at present to replace it with anotherflight. e. Aircraft depreciation is due entirely to obsolescence.Depreciation due to wear and tear is negligible. f. Dropping flight482 would not allow Pegasus Airlines to reduce the number ofaircraft in its fleet or the number of flight crew on its payroll.Required: 1. Prepare an analysis showing what impact droppingflight 482 would have on the airline's profits. (Any losses/reductions should be indicated by a minus sign.)
