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 90Average load factor (percentage of seats filled) 70%Average full passenger fare $ 160Average variable cost per passenger $ 70Fixed operating cost per month $3,150,000

Formula :Revenue = Units Sold * Unit priceContribution Margin = Revenue – All Variable CostContribution Margin Ratio = Contribution Margin/Selling PriceBreak Even Points in Units = (Total Fixed Costs + Target Profit )/Contribution MarginBreak Even Points in Sales = (Total Fixed Costs + Target Profit )/Contribution Margin RatioMargin of Safety = Revenue - Break Even Points in SalesDegree of Operating Leverage = Contribution Margin/Net IncomeNet Income = Revenue – Total Variable Cost – Total Fixed CostUnit Product Cost using Absorption Cost = (Total Variable Cost + Total Fixed Cost)/# of units

a. Contribution margin per passenger =$160 - $70 = $90 per passengerContribution margin ratio = $90 / $160 = .5625Break-even point in passengers = Fixed costs/Contribution Margin = $3,150,000 / $90 Passengers = 35,000Break-even point in dollars = Fixed Costs/Contribution Margin Ratio = $3,150,000 / .5625$5,600,000

b. Compute # of seats per train car (remember load factor?) = 90 x 70% = 63 passengers per train carIf you know # of BE passengers for one train car and the grand total of passengers, you can compute # of train cars (rounded) = 35,000 / 63 = 556 train cars

c. Contribution margin = $190 - $70 = $120Break-even point in passengers = fixed costs/ contribution margin Passengers = $3,150,00 / $120 = 26,250 passengers train cars (rounded) = 26,250 / (90x60%=54)= 486 train cars

d. Contribution margin = $160 - $90 = $70Break-even point in passengers = fixed costs/contribution margin Passengers =3,150,000 / $70 = 45,000 passengers train cars ( rounded) = 45,000 / (90x70%=63) = 714 train cars

e. Before tax profit less the tax rate times the before tax profit = after-tax income = $750,0001x -.30x = 750,000

.70x= 750,000X=750,000 / .70 = $1,071429 before tax profit# of passengers -= $1,071,429 + 3600,000 / (205 -85= 120) = 38,929 passengers

f. # of discounted seats = 90 x 10% (80%-70%)= 9 seatsContribution margin for discounted fares X # discounted seats = $ each train X$ ? train cars per day X ? days per month= $? minus $ additional fixed costs = $? pretax income.

$50 x 9 seats = $450 each train$450 x 50 train cars per day = $22,500 per day$22,500 x 30 days = $675,000 per month$675,00 - $180,000 = $495,000 pre-tax income for the discounted fare

Contribution Margin = $120 - $70 = $50

g. 1. No, Springfield should not obtain the route because it would suffer a loss.

Compute Contribution margin$175 - $70 = $105

Then, # seats X $ X # train cars = (90x60%=54) x $105 x 20 $113,400Increased fixed cost ($250,000) Pretax gain (loss) on new route ($136,600)

2 and 3. Compute # of passengers and train cars using computation approaches employed in some of the above problems.

2. Contribution Margin = $175 - $70 = $105 per passenger

# Passengers = 120,000 + 250,000 / 105 = 3,524 passengers to attain target profit of $120,000

# train cars 3,534 / (90 x 60% = 54) = 65 train cars needed with 60% load factor.

3. 3,534 / (90 x 75%= 67.5) = 52 train cars needed with 75% load factor.

4. Qualitative factors Springfield should consider in making decisions about acquiring a new route are the following:

a. External Reputation of the company. Adding new routes will give the customers more choices, therefore strengthening the customer service of the company.

b. The size and demographic of the population of the new route. As this will determine the number of passengers that might take the route.

c. Laws and regulations of the surrounding area, such as additional taxes.

d. Existence of competition or other forms of transportation, such as airplanes or buses, in the new route.

e. Management has to consider the effect on the labor relations in the company, do they need to hire additional personnel or pay overtime for the additional routes.