What is the break-even point in passengers and revenues per month? First we have to figure out the contribution Margin = Sales per fare – variable expense per unit: $160.00 – $70.00 = $90.00 (Contribution Margin. Break Even point in passengers= Fixed costs (divided) contribution Margin: $3,150,000 / $90 = 35,000 passengers. Break-even point in revenues per month = Fare sales to breakeven (X) Sales per unit. 35,000 x $160 = $5,600,000

•What is the break-even point in number of passenger train cars per month? At 70% load = 90 x 70% = 63 Breakeven point in passengers = 35,000/63 = 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? 90 seats x 60% = 54 Contribution Margin = $190 – $70 = $120 Fixed costs $3,150,000/ $120 = 26250 Passengers 26250/54 = 486 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? Contribution margin = ($160 – $90) = $70

3,150,000/70 = 45,000

Breakeven point in number of passenger cars per month:

90×70% = 63

45,000/ 63 = 714 cars

e) Springfield Express has experienced an increase in variable cost per passengers 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 Contribution Margin: $205- $85 = $120.00

Profit=after tax profit/tax rate = $750,000x 70% = $1,071,429 Breakeven point

in passengers =

$3,600,000 + $1071.429 = $4,671,429 (divided) $120 (CM) = 38,929 Passengers

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? CM= $120 – $70 = $50

Load Factor = 80% – 70% = 10%

Additional Rider CM = 50 cars x 90 seats x 10% = 450

Per day Revenue:

$160 x 3150 = $504,000 + $54,000 ($120 x 450) = $558,000

Variable cost per day: 70 x 3,600 (total seats) = $252,000

Per day income: $558,000 – $252,000 = $306,000 x 30 days = $9,180,000 Profit = $9,180,000 – $3,150,000 – $180,000 (addtl. monthly advertising cost) = $5,850,000.

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. CM = $175 – $70 = $105

Number of passengers x load factor = 90 x 60% = 54

CM per ride: ($175 – $70) = $105 x (90 x 60% load) 54 = $5670 x 20 rides = $113,400 (per month) 1. Should the company obtain the route?

I don’t think it would be profitable unless we can increase the number of passengers a month for this route in order to break even 2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route? Profit = CM x Q – fixed expenses

$175x – $70x – $250,000 = $120,000

$105x = $370,000

X = 3,524

3524/54 = 65 train cars

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? CM = $105

90 x 75% = 67.5

67.5 x $105 x 20 cars = $141,750

$175 – $70 = $105

$105 = $370,000 ($250,000 + $120,000)

3,524 passengers

3,524/67.5 = 52 trains

4) What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route? Considerations in decision making in addition to the qualitative or financial factors highlighted by incremental analysis. They are the factors relevant to a decision that are difficult to measure in terms of money. Qualitative factors may include effect on employee morale, schedules and other elements, relationships with and commitments to suppliers, effect on present and future suppliers and effect on present and future customers.

Courtney from Study Moose

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