This essay sample on 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: provides all necessary basic info on this matter, including the most common “for and against” arguments. Below are the introduction, body and conclusion parts of this essay.
The costs are really incurred in order to be able to hunt ducks and would be the same Whether one, two, three, or a dozen ducks ever actually sol All Of the costs, with the possible exception of the costs of the shotgun shells, are basically fixed with respect to how many ducks are actually bagged during any one hunting trip.
3. In a decision of whether to give up hunting entirely, more of the costs listed by John are relevant.
If Bill did not hunt, he would not need to pay for: gas, oil, and tires; shotgun shells; the hunting license; and the whiskey, In addition, he loud be able to sell his camper, equipment, boat, and possibly pickup truck, the proceeds vehicle would be considered relevant in this decision, The original costs to these items are not relevant, but their resale values are relevant.
Exercise 13-10 (continued) These three requirements illustrate the slippery nature of costs, A cost that is relevant in one situation can be irrelevant in the next. None of the costs-? except possibly the cost of the shotgun shells-?are relevant when we compute the cost of bagging a particular duck; some of them are relevant when we compute the cost of a hunting trip; and more of them are relevant when we insider the possibility of giving up hunting.
Dropping Retaining a Flight ALL I 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.
IA 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: I I 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. I I One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion of the insurances Company, the destination of the flight is in a “high-risk” area.
The remaining Vivo-thirds would he unaffected by a decision I Tit drop flight 482, The baggage loading and flight preparation expense is an allocation to ground crews’ salaries and depreciation of ground I equipment, Dropping flight 482 would have no effect on the company’s total baggage loading and flight preparation expenses, Lifting 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
I 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 flight I crew on its payroll. I I Required: I Prepare an analysis showing What impact dropping flight 482 would have on the airline’s profits. I The airline’s scheduling Officer has been criticized because only about Of the seats on Pegasus’ flights are being Filled compared to an industry average of 60%. The scheduling officer has explained that Pegasus’ average seat occupancy I could be improved considerably by eliminating about 10% of its flights, but that doing so would reduce profits. Explain how I latish could happen.
Contribution margin lost if the flight is 2,950) flight is discontinued: promotion Fuel for aircraft discontinued I Flight costs that can be avoided if the Flight IS 750 15,800 1 Liability insurance (1/3 x $4,200) Salaries, flight assistants 1 ,400 | 11,500 Overnight costs for flight crew and assistants | 300 | 9,750 | I (3,200) Net decrease in profits if the flight is discontinued The following costs are not relevant to the decision: I Salaries, flight crew will not change.
I I Depreciation of aircraft I Liability insurance (two-thirds) insurance is unaffected by this decision. I Baggage loading and flight preparation cost that will continue even if the flight is I discontinued. I Operating Income I I lancers or (Decrease) 514,000 1 ,so | 12,950 expenses: Salaries, flight crew Flight promotion Ticket revenue 4,000) 1,050 | (12,950) Fixed annual salaries, which Consists.
I Two-thirds of the liability This is an allocated Problem MM (continued) I Keep the Flight Drop the Flight I Variable expenses Contribution margin I I Less flight 11,800 1750 I Depreciation of aircraft 1,550 11,550 4,200 preparation | 2,800 I Fuel for aircraft 5,800 11,400 11,700 Overnight costs for flight crew and I Liability insurance Salaries, flight assistants Baggage loading and flight 300 1 7,600 I lasting’s at destination I I Total flight expenses | 7. 850 | 9,750 .NET operating loss I $ (4,650) I $ (7,850) 2. The goal of increasing the seat occupancy could be obtained by eliminating flights with a lower-than-average seat occupancy.
By eliminating these flights and keeping the flights with a higher-than-average seat occupancy, the overall average seat occupancy for the company as a whole would be improved. This loud reduce profits in at least two ways. First, the flights that are eliminated could have contribution margins that exceed their avoidable costs (such as in the case of flight 482 in part 1). If so, then eliminating these flights would reduce the company’s total contribution margin more than it would reduce total costs, and profits would decline. Second, these flights might be acting as “feeder flights, bringing passengers to cities where connections to more profitable flights are made.
I PROBLEM 13-20
I Dropping or Retaining a Segment 102 I I Jackson County Senior Services is a nonprofit organization devoted to roving essential services to seniors who live in their loon homes vitamin the Jackson County area. Three services are provided for seniors-?home nursing, meals on wheels, and I housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to I I perform tests ordered by their physicians. The meals on wheels program delivers a hot meal once a day to each senior enrolled I I in the program. The housekeeping service provides weekly housecleaning and maintenance services.
Data on revenue and expenses I LIFO the past year follow: I The head administrator of Jackson County Senior Services, Judith Minima, is concerned about the organization’s finances and Considers the net operating income of $5,000 last year to be razor-thin. (Last year’s results were very similar to the results LIFO previous years and are representative of what would he expected in the future. ) She feels that the organization should be I ‘building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession, After seeing the I above report, Ms. Minima asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.
The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to Elf the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary Of the program I I administrator would be avoided. I Should the housekeeping program be discontinued? Explain. Show computations to support your answer. I I Recast the above data in a format that would be more useful to management in guessing the long-run financial viability of the Various services. 1.
No, the housekeeping program should not be discontinued. It is actually generating a positive program segment margin and is, of course, providing a valuable service to seniors. Computations to support this conclusion follow: I I Contribution margin lost if the housekeeping program is dropped avoided: Insurance I I Program administrators salary I Fixed costs that can be II Liability | 37,000 | 52,000 whole Decrease in net operating income for the organization as a Depreciation on the van is a sunk cost and the van has no salvage value overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision.