Case Study 1
Springfield Express is a luxury
passenger carrier in Texas. All seats are first class, and the following data
are available:
Number of seats
per passenger train car 90
Average load
factor (percentage of seats filled) 70%
Average full
passenger fare
$ 160
Average variable
cost per passenger
$ 70
Fixed operating
cost per month
$3,150,000
Formula :
Revenue = Units Sold * Unit price
Contribution Margin = Revenue – All Variable Cost
Contribution Margin Ratio = Contribution Margin/Selling
Price
Break Even Points in Units = (Total Fixed Costs + Target
Profit )/Contribution Margin
Break Even Points in Sales = (Total Fixed Costs + Target
Profit )/Contribution Margin Ratio
Margin of Safety = Revenue – Break Even Points in Sales
Degree of Operating Leverage = Contribution Margin/Net
Income
Net Income = Revenue – Total Variable Cost – Total Fixed
Cost
Unit Product Cost using Absorption Cost = (Total Variable Cost + Total Fixed Cost)/#
of units
a. Contribution
margin per passenger =?
Contribution margin ratio =?
Break-even point in passengers =
Fixed costs/Contribution Margin =
Passengers =?
Break-even point in dollars =
Fixed Costs/Contribution Margin Ratio =
$ ?
b. Compute
# of seats per train car (remember load factor?)
If you know # of BE passengers for
one train car and the grand total of passengers, you can compute # of train
cars (rounded) =?
c. Contribution margin =?
Break-even point in passengers =
fixed costs/ contribution margin
Passengers =?
train cars (rounded) =?
d. Contribution
margin =?
Break-even point in passengers =
fixed costs/contribution margin
Passengers =?
train cars ( rounded) = ?
e. Before
tax profit less the tax rate times the before tax profit = after-tax income = $
?
Then, proceed to compute # of
passengers -=?
f.
# of discounted seats = ?
Contribution margin for
discounted fares X # discounted seats =
$ each train X$ ? train cars per day X ? days per month= $? minus $ additional fixed costs = $? pretax income.
g. 1.
Compute Contribution margin
Then,
# seats X $ X # train cars
= $ ?
Increased fixed cost
( ?)
Pretax gain (loss) on new
route
$
2 and 3. Compute # of passengers and train cars using
computation approaches employed in some of the above problems.
4. Springfield should consider
such things as (Think of qualitative factors that are important. In other words, not the numbers but other
things that have to be considered, e.g., risks)
Questions
“Springfield Express is a luxury passenger carrier in Texas. All seats are first class, and the following data are available:
Number of seats per passenger train car 90
Average load factor (percentage of seats filled) 70%
Average full passenger fare $ 160
Average variable cost per passenger $ 70
Fixed operating cost per month $3,150,000
a. What is the break-even point in passengers and revenues per month?
b. What is the break-even point in number of passenger train cars per month?
c. If Springfield Express raises its average passenger fare to $ 190, it is estimated that the average load factor will decrease to 60 percent. What will be the monthly break-even point in number of passenger cars?
d. (Refer to original data.) Fuel cost is a significant variable cost to any railway. If crude oil increases by $ 20 per barrel, it is estimated that variable cost per passenger will rise to $ 90. What will be the new break-even point in passengers and in number of passenger train cars?
e. Springfield Express has experienced an increase in variable cost per passenger to $ 85 and an increase in total fixed cost to $ 3,600,000. The company has decided to raise the average fare to $ 205. If the tax rate is 30 percent, how many passengers per month are needed to generate an after-tax profit of $ 750,000?
f. (Use original data). Springfield Express is considering offering a discounted fare of $ 120, which the company believes would increase the load factor to 80 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising cost would be $ 180,000. How much pre-tax income would the discounted fare provide Springfield Express if the company has 50 passenger train cars per day, 30 days per month?
g. Springfield Express has an opportunity to obtain a new route that would be traveled 20 times per month. The company believes it can sell seats at $ 175 on the route, but the load factor would be only 60 percent. Fixed cost would increase by $ 250,000 per month for additional personnel, additional passenger train cars, maintenance, and so on. Variable cost per passenger would remain at $ 70.
1. Should the company obtain the route?
2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route?
3. If the load factor could be increased to 75 percent, how many passenger train cars must be operated to earn pre-tax income of $ 120,000 per month on this route?
4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?
