H1.Account Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, thecompany is thinking about dropping several flights that appear to be unprofitable.A typical income statement for one round-trip of one such flight (flight 482) is as follows:Ticket revenue (165 seats x 40% occupancy x $220 ticket price) $ 14,520Variable expenses ($17.00 per person)1,122Contribution margin13,398Flight expenses:Salaries, flight crewFlight promotionDepreciation of aircraftFuel for aircraftLiability insuranceSalaries, flight assistantsBaggage loading and flight preparationOvernight costs for flight crew and assistants at destinationTotal flight expensesNet operating loss$ 1,6007601,5005,1005,4001,3001,85060018,110$ (4,712 )100.0 %7.792.3 %The following additional information is available about flight 482:Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number ofround trips they complete.Required:1. What is the financial advantage (disadvantage) of discontinuing flight 482?One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurancecompany, the destination of the flight is in a "high-risk" area. The remaining two-thirds would be unaffected by a decisionto drop flight 482.The baggage loading and flight preparation expense is an allocation of ground crews' salaries and depreciation of groundequipment. Dropping flight 482 would have no effect on the company's total baggage loading and flight preparationexpenses.If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the number of flightcrew on its payroll.

The financial advantage and disadvantage of discontinue the product is calculated by deducting the…

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows:

Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company's performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows:

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 7P: Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beach. Management must...

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Poleski Manufacturing, which maintains the same level of inventory at the end of each year, provided the following information about expenses anticipated for next year: The selling price of Poleskis single product is 16. In recent years, profits have fallen and Poleskis management is now considering a number of alternatives. Poleski wants to have a net income next year of 250,000, but expects to sell only 120,000 units unless some changes are made. The president of Poleski has asked you to calculate the companys projected net income (assuming 120,000 units are sold) and the sales needed to achieve the companys net income objective for next year. Also, compute Poleskis contribution margin per unit, contribution margin ratio, and break-even point for next year. The worksheet CVP has been provided to assist you. Note that the data from the problem have already been entered into the Data Section of the worksheet.
Myrtle Air Express decided to offer direct service from Cleveland to Myrtle Beach. Management must decide between a full-price service using the companys new fleet of jet aircraft and a discount service using smaller-capacity commuter planes. It is clear that the best choice depends on the market reaction to the service Myrtle Air offers. Management developed estimates of the contribution to profit for each type of service based on two possible levels of demand for service to Myrtle Beach: strong and weak. The following table shows the estimated quarterly profits (in thousands of dollars): a. What is the decision to be made, what is the chance event, and what is the consequence for this problem? How many decision alternatives are there? How many outcomes are there for the chance event? b. If nothing is known about the probabilities of the chance outcomes, what is the recommended decision using the optimistic, conservative, and minimax regret approaches? c. Suppose that management of Myrtle Air Express believes that the probability of strong demand is 0.7 and the probability of weak demand is 0.3. Use the expected value approach to determine an optimal decision. d. Suppose that the probability of strong demand is 0.8 and the probability of weak demand is 0.2. What is the optimal decision using the expected value approach? e. Use sensitivity analysis to determine the range of demand probabilities for which each of the decision alternatives has the largest expected value.
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (170 seats × 40% occupancy × $210 ticket price) $ 14,280 100.0% Variable expenses ($19.00 per person) 1,292 9 Contribution margin 12,988 91% Flight expenses: Salaries, flight crew $ 1,600 Flight promotion 790 Depreciation of aircraft 1,750 Fuel for aircraft 5,100 Liability insurance 4,800 Salaries, flight assistants 1,300 Baggage loading and flight preparation 1,900 Overnight costs for flight crew and assistants at destination 600 Total flight expenses 17,840 Net operating loss $ (4,852) The following additional information is available about flight 482: Members of the flight crew are paid fixed annual salaries,…
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (165 seats × 40% occupancy × $220 ticket price)$ 14,520100.0%Variable expenses ($20.00 per person)1,3209.1Contribution margin13,20090.9%Flight expenses: Salaries, flight crew$ 1,800 Flight promotion760 Depreciation of aircraft1,800 Fuel for aircraft5,400 Liability insurance5,100 Salaries, flight assistants1,200 Baggage loading and flight preparation1,750 Overnight costs for flight crew and assistants at destination700 Total flight expenses18,510 Net operating loss$ (5,310) The following additional information is available about flight 482: Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips…
Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: Ticket revenue (175 seats × 40% occupancy × $240 ticket price) $ 16,800 100.0 % Variable expenses ($18.00 per person) 1,260 7.5 Contribution margin 15,540 92.5 % Flight expenses: Salaries, flight crew $ 2,000 Flight promotion 790 Depreciation of aircraft 1,700 Fuel for aircraft 5,500 Liability insurance 5,100 Salaries, flight assistants 1,300 Baggage loading and flight preparation 1,950 Overnight costs for flight crew and assistants at destination 500 Total flight expenses 18,840 Net operating loss $ (3,300 ) 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:Ticket revenue (175 seats × 40% occupancy × $400 ticket price) $ 28,000 100.0%Less: Variable expenses ($15 per person) 2,100 7.5 Contribution margin 25,900 92.5%Less: Flight expenses: Salaries, flight crew 3,600 Flight promotion 1,500 Depreciation of aircraft 3,100 Fuel for aircraft 13,600 Liability insurance 8,400 Salaries, flight attendants 1,000 Baggage loading and flight preparation 3,400 Overnight costs for flight crew and attendants at destination 600Total flight expenses 35,200Net operating loss $ (9,300)The following additional information is available about Flight 482:a. Members of the flight crew are paid fixed annual salaries, whereas the…
Dropping or Retaining a Flight Profits have been decreasing for several years at Pegasus Airlines. In an effort to improve the company’s performance, the company is thinking about dropping several flights that appear to be unprofitable. A typical income statement for one round-trip of one such flight (flight 482) is as follows: The following additional information is available about flight 482: a. Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based on the number of round trips they complete. b. One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurance company, the destination of the flight is in a “high-risk” area. The remaining two-thirds would be unaffected by a decision to drop flight 482. c. The baggage loading and flight preparation expense is an allocation of ground crews’ salaries and depreciation of ground equipment. Dropping flight 482 would have no effect on…
Sun Airlines is a commercial airline that targets business and non-business travelers. In recent months, the airline has been unprofitable. The company has break-even sales volume of 75% of capacity, which is significantly higher than the industry average of 65%. Sun’s CEO, Neil Armstrong, is concerned about the recent string of losses and is considering a strategic plan that could reduce the break-even sales volume by increasing ticket prices. He has asked for your help in evaluating this plan.
Sun Airlines is a commercial airline that targets business and non-business travelers. In recent months, the airline has been unprofitable. The company has break-even sales volume of 75% of capacity, which is significantly higher than the industry average of 65%. Sun's CEO, Neil Armstrong, is concerned about the recent string of losses and is considering a strategic plan that could reduce the break-even sales volume by increasing ticket prices. He has asked for your help in evaluating this plan. Write a brief memo to Neil Armstrong evaluating this strategy. Include your reasoning.
PEM, Incorporated, is experiencing financial difficulty due to erratic sales of its only product, a high-capacity battery for laptop computers. The company’s contribution format income statement for the most recent month is given below: Sales (13,000 units × $20 per unit) $ 260,000 Variable expenses 156,000 Contribution margin 104,000 Fixed expenses 116,000 Net operating loss $ (12,000) The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $33,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?
If the Advanced tours are discontinued, one administrative position could be eliminated, saving the company $100,000. Assuming no change in the sales of Beginner tours, what effect would dropping the Advanced tour have on the company’s operating income?
Due to erratic sales of its sole product, a high capacity battery for laptop computers, Salcedo Company has been experiencing difficulty for some time. The company's income statement for the most recent month is given below: Sales (19,500 units @ P500) P9,750,000 Less variable expenses (7,995,000) Contribution margin 1,755,000 Less fixed expenses 1,800,000 Net loss P (45,000) The president believes that a P160,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an P800,000 increase in monthly sales. If the president is right, what will be the effect on the company's monthly net income or loss? (Indicate whether the effect would be increase or decrease, e.g. 1000 decrease, 1000 increase)