Prepare an ANALYSIS showing what impact dropping flight 7J6622 would have on the airline's profit. CA Gopal Verma would be using this analysis in…

As per the statement given in the problem, Flight 7J6622 incurs a net loss of 380.000. This is the net result of revenue less costs. Revenue is entirely variable depending upon passenger occupancy. Costs are both variable and fixed nature. To analyze the impact of dropping Flight 7J6622, we need to re-compute net gain/ (loss) that YIAL earns when it operates the flight based on relevant costing principles. Net Gain/ (Loss) = Revenue earned from flight operations less Variable costs of operation Revenue earned is the ticket revenue earned from flight operations of 7J6622, this is entirely variable. Variable costs of flight operations are those expenses that would be incurred only when the flight is operated. These include variable expenses per passenger, salaries flight assistants, overnight costs for flight crew and assistants, fuel for aircraft, a third portion of flight insurance that is specifically related to this flight sector and flight promotion expense. These are expenses that will not be incurred if the flight is not operated. Hence, relevant for decision making. Other expenses like salaries of flight crew and hanger parking fees for aircraft are fixed expenses that will be incurred even if the flight does not operate. Loading and flight preparation expense is an allocated cost that will continue to be incurred even if flight 7J6622 does not operate. Depreciation of aircraft and liability insurance expense (2/3rd portion not related to a specific flight sector) are sunk costs. These expenses have already been incurred and hence are irrelevant to decision making. Therefore, these fixed, allocated and sunk expenses are ignored while analyzing the decision whether to continue operating flight 7J6622. Statement showing Net Gain / (loss) if flight operations continue ₹ ₹ Contribution margin if flight operations continue 600,000 Less: Relevant costs if flight operations continue Salaries, Flight Assistants 80,000 Fuel for Aircraft 250,000 Liability Insurance (1/3 which is the special charge for high risk destinations) 50,000 Flight Promotion 50,000 Overnight Costs for Flight Crew and Assistants 80,000 Total relevant costs if flight continues to operate 510,000 Net Gain / (Loss) 90,000 If YIAL discontinues flight 7J6622, profits will reduce by - 90,000. The statement showing loss in operations of 380,000 is misleading for decision making purpose because it accounts for costs that are fixed and irrelevant. However, since flight 7J6622 yields a net gain of 90,000, flight operations should continue.