Question & Answer: Freeflight Airlines is presently operating at 70 percent of capacity. Management of the airline is considering dropping Freeflight's routes between Europ…..

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):

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Routes Within U.S. Within Europe Between U.S.
and Europe
Sales $ 3.27 $ 2.87 $ 2.92
Variable costs 1.24 1.00 1.80
Fixed costs allocated to routes 1.68 1.30 1.40
Operating profit (loss) $ 0.35 $ 0.57 $ (0.28 )

Required:

a. Prepare a differential cost schedule. (Enter your answers in millions rounded to 2 decimal places.)

Status Quo Alternative: Drop U.S. to Europe Difference (all lower under the alternative)
Revenue
Less: Variable costs
Contribution margin
Less: Fixed costs
Operating profit (loss)

b. Should Freeflight drop the routes between Europe and the United States?

Yes
No

Expert Answer

 

a.

Status Quo Alternative: Drop U.S. to Europe Difference (all lower under the alternative)
Revenue $9.06 $6.14 ($2.92)
Less: Variable cost 4.04 2.24 1.80
Contribution margin $5.02 $3.90 ($1.12)
Less: Fixed costs 4.38 3.50 0.88
Operating profit (loss) $0.64 $0.40 (0.24)

b. No

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