Question

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 Within U.S. Within Europe Between U.S. and Europe Sales $ 3.34 $ 2.88 $ 2.93 Variable costs 1.25 0.97 1.77 Fixed costs allocated to routes 1.62 1.28 1.38 Operating profit (loss) $ 0.47 $ 0.63 $ (0.22 ) Prepare a differential cost schedule.

Answer 1

Answer:

Dropping Freeflight's routes between Europe and United States would reduce the overall profits of Freeflight Airlines by $304,000 monthly($880000-$576000)

Explanation:

As  a result of dropping routes between Europe and United States,total revenue drops  to $6.22m and variable costs to $2.22m,but only 20% of fixed costs can be saved ,hence current fixed costs become $3.42m giving overall profit of $0.58m instead of $0.88m recorded previously when all routes were operational.

Find attached spreadsheet showing differential cost schedule.

Download xlsx