Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 44

Dropping Product Lines

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.Sand Europe
Sales	$3.4	$2.6	$ 2.8
Variable costs	1.4	1.0	1.5
Fixed costs allocated to routes	1.7	1.3	1.4
Operating profit (loss)	$0.3	$0.3	$(0.1)

Required

Prepare a differential cost schedule like the one in Exhibit 4.8 to indicate whether Freeflight should drop the routes between the United States and Europe.