The key factor is not how much of a constrained resource a product uses, but rather how much
contribution margin the product generates per unit of the constrained resource.
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 round-trip of one such flight (flight 482) is as follows:
Ticket revenue (175 seats
$200 ticket price)
Variable expenses ($15 per person)
Salaries, flight crew
Depreciation of aircraft
Fuel for aircraft
Salaries, flight assistants
Baggage loading and flight preparation
Overnight costs for flight crew and
assistants at destination
Total flight expenses
Net operating loss
The following additional information is available about flight 482:
Members of the flight crew are paid fixed annual salaries, whereas the flight assistants are paid based
on the number of round trips they complete.
One-third of the liability insurance is a special charge assessed against flight 482 because in the opinion
of the insurance company, the destination of the flight is in a "high-risk" area. The remaining two-thirds
would be unaffected by a decision to drop flight 482.
The baggage loading and flight preparation expense is an allocation of ground crews' salaries and
depreciation of ground equipment. Dropping flight 482 would have no effect on the company's total
baggage loading and flight preparation expenses.
If flight 482 is dropped, Pegasus Airlines has no authorization at present to replace it with another flight.
Aircraft depreciation is due entirely to obsolescence. Depreciation due to wear and tear is negligible.
Dropping flight 482 would not allow Pegasus Airlines to reduce the number of aircraft in its fleet or the
number of flight crew on its payroll.
By how much will the profits increase or decrease if flight 482 is discontinued?
(Input the amount as
positive value. Omit the "$" sign in your response.)