November 16, 2014
Charisma Watkins
Managerial Accounting
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
Passengers Per Train 90
Load Factors 70%
Full Fare Seats Filled (90) * (.7) 63 Fare $ 160
Less Variable Costs Per Customer $ 70
Contribution Margin Per Customer (160) - (70) $ 90 Revenue Per Car (160) * (63) $ 10,080
Contribution Margin Per Car (90) * (63) $ 5,670
Fixed Costs $3,150,000
a. What is the break-even point in passengers and revenues per month?
Break-even point in passengers per month - $3,150,000 / 90 = $35,000
Break-even point in revenues per month - $35,000 * 4 = $5,600,000
b. What is the break-even point in number of passenger train cars per month?
Break-even point in number of passenger train cars per month - $3,150,000 / $ 5,670 = 555.56 rounded up = 556 cars
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?
(14) New Fare $ 190
(15) Load Factor 60%
(16) Passengers Per Car 90
(17) Fixed Costs $ 3,150,000
Breakeven $ 3,150,000 / $ 190 * .6 * 90 307.02
Monthly break-even point in number of passenger cars = 308 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?
(18) New Variable Costs $ 90
(19) New Contribution Margin Per Passenger (160 – 90) 70
(20) Fixed Costs 3,150,000
(21) Breakeven Passengers (3,150,000 / 70) 45,000
(22) Breakeven Number of Train Cars (45,000) / (63) 714.29
New break-even point in passengers = $45,000
New break-even point in number of Train Cars = 715
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?
New VC per Passenger $ 85
New Total Fixed Costs $ 3,600,000
After Tax Needed Profit $ 750,000
Tax Rate 30%
Before Tax Needed Profit (750,000 / (90 - (1-.30) $ 1,071,428.57
Before Tax Needed Contribution Margin (1,071,428.57) + (3,600,000) $ 4,671,428.57
Average New Fare $ 205
Contribution Margin Per Customer (205) - (85) $ 120
Number of Customers Needed 38,928.57
Whole Number of Customers Needed 38,929
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?
Original Load Factor 70%
New Load Factor 80%
Total Seats 90
Extra Seats Sold [(90 * (.8 - .7)] 9
Discounted Fare $ 120
Trains Per Day 50
Days Per Month 30
Extra Revenue (9 * 120 * 50 * 30) $ 1,620,000
Additional Advertising Expense $ 180,000
Additional Pre-Tax Income (1,620,000) - (180,000) $ 1,440,000
g. Springfield Express has an opportunity to obtain a new route that would be traveled 20
