Case Study 1 Week 3
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?
Number of seats per passenger
train car 90
Average load factor (percentage
of seats filled)
60%
Average full passenger fare
$ 190
Average variable cost per
passenger
$ 70
Fixed operating cost per month
$3,150,000
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?
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
$ 90
Fixed operating cost per
month $3,150,000
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?
Number of seats per passenger
train car 90
Average load factor (percentage
of seats filled) 70%
Average full passenger fare
$ 205
Average variable cost per
passenger
$ 85
Fixed operating cost per
month $3,600,000
Tax rate 30%
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?
TUTORIAL PREVIEW
a. What is the break-even point
in passengers and revenues per month?
Contribution margin
per passenger = Average full passenger fare – Average variable cost per
passenger
= $160 - $70
= $90
Contribution margin
ratio = Contribution margin/ Selling price
= $90/ $160
= 0.5625 or
56.25%
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