1 answer

Freeflight Airlines is presently operating at 70 percent of capacity, Management of the airline is considering...

Question:

Freeflight Airlines is presently operating at 70 percent of capacity, Management of the airline is considering dropping Freef
Freeflight Airlines is presently operating at 70 percent of capacity, Management of the airline is considering dropping Freeflight's routes between Europe and the United States. If these routes are dropped, the revenue associated with the routes would be lost and the related variable costs saved. In addition, the company's total fixed costs would be reduced by 20 percent Segmented income statements for a typical month appear as follows (all amounts in millions of dollars): Routes Sales Variable costs Fixed costs allocated to routes Operating profit (105) Within U.S. $3.33 1.34 1.63 $0.36 Within Europe $2.84 0.90 1.27 $0.67 Between U.S. and Europe $ 2.89 1.70 1.37 $(0.18) Required: a. Prepare a differential cost schedule. (Select option "increase" or "decrease", keeping Status Quo as the base. Select "none" if there is no effect. Enter your answers in millions rounded to 2 decimal places.) Answer is complete but not entirely correct. Difference Revenue Less: Variable costs Contribution margin Less: Fixed costs Operating profit (los) Alternative: Drop Status Quo U.S. to Europe $ 9.06 $ 6.17$ 3.94 2.24 $ 5.12$ 3938 4.27 2.90 $ 0.85$ 1.03 S (2.89) (1.70) (1.19) (1.37) 0.18 decrease decrease decrease decrease increase b. Should Freeflight drop the routes between Europe and the United States? Yes No

Answers

a)

Status quo Alternate - Drop U.S. to Europe Difference
Revenue 9.06 6.17 (2.89) Decrease
Less: Variable costs 3.94 2.24 (1.70) Decrease
Contribution margin 5.12 3.93 (1.19) Decrease
Less: Fixed costs 4.27 3.42 (0.85) Decrease
Operating profit 0.85 0.51 (0.34) Decrease

Fixed costs = $4.27 million

Decrease in fixed costs by dropping U.S. to Europe = 4.27 x 20%

= $0.85 million

Fixed costs after dropping U.S. to Europe = 4.27 - 0.85

= $3.42 million

b)

Freeflight should not drop route between Europe and the United States.

.

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