AC505 Case Study IIManagerial Finance

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?

Break-even point in passengers = | Total Fixed Costs + Target Profit| | | | Contribution Margin per passenger|

| | =| 3,150,000 + 0|

| | | 160-70|

| | =| 3,150,000|

| | | 90|

| | = | 35,000 is the break-even point in passengers| Break-even point in revenues = | Total Fixed Costs + Target Profit| | | | Contribution Margin Ratio|

| | =| 3,150,000 + 0|

| | | (160-70) / 160|

| | =| 3,150,000|

| | | 0.5625|

| | =| $5,600,000 break-even point in revenues|

b. What is the break-even point in number of passenger train cars per month? Break-even point in train cars = | Total Fixed Costs + Target Profit| | | | Contribution Margin per train car|

| | =| 3,150,000 + 0|

| | | (160-70) * (90*.70)|

| | =| 3,150,000|

| | | 90*63|

| | =| 556 break-even point in train 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? Break-even point in train cars =| Total Fixed Costs + Target Profit| | | | Contribution Margin per train car|

| | =| 3,150,000 + 0|

| | | (190-70) * (90*.60)|

| | =| 3,150,000|

| | | (120) * (54)|

| | =| 486.1 or 487 train 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? Break-even point in passengers = | Total Fixed Costs + Target Profit| | | | Contribution Margin per train car|

| | =| 3,150,000 + 0|

| | | 160 - 90|

| | =| 3,150,000|

| | | 70|

| | =| 45,000 break-even point in passengers|

Break-even point in train cars = | Total Fixed Costs + Target Profit| | | | Contribution Margin per train car|

| | =| 3,150,000 + 0|

| | | (160-90) * (90*.70)|

| | =| 3,150,000|

| | | 70 * 63|

| | =| 714.29 or 715 break-even point in train cars|

| | | |

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? Break-even point in passengers = | Total Fixed Costs + Target Profit| | | | Contribution Margin per passenger|

| | =| 3,600,000 + (750,000) / .70|

| | | 205 - 85|

| | =| 3,600,000 + 1,071,428.60|

| | | 120|

| | =| 4,671,429|

| | | 120|

| | =| 38,928.58 or 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? Pre-tax income of the discounted fare =| Revenue - (Fixed Cost + Variable Cost)| | | | |...