Case Study 2
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
Average load factor (percentage of seats filled)
Average full passenger fare
Average variable cost per passenger
Fixed operating cost per month
Revenue = Units Sold * Unit price
Contribution Margin = Revenue – All Variable Cost
Contribution Margin Ratio = Contribution Margin ÷ Selling Price Break Even Point in Units = (Total Fixed Costs + Target Profit) ÷ Contribution Margin Break Even Point 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
What is the break-even point in passengers and revenues per month?
Contribution margin = Sales per unit - Variable expenses per unit = $160 - $70 = $90
Break-even point in passengers = Fixed costs ÷ Contribution Margin = 3,150,000 ÷ 90 = 35,000 passengers
Break-even point in revenues per month = Unit sales to break even X Sales per unit = 35,000 X $160 = $5,600,000 revenue
What is the break-even point in number of passenger train cars per month?
Compute number of seats per train car (remember load factor?) = (90 X 70%) = 63
Break-even point in passengers = 35,000 passengers
Number of cars = 35,000 ÷ 63 = 556 cars
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?
Contribution margin = $190 – $70 = $120
Compute number of seats per train car (remember load factor?) = (90 X 60%) = 54
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