Week 3_Course Project A - CASE STUDY

ACCT 505- Prof Main

January 26, 2013

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? Fixed cost | $ 3,150,000| |

Selling price | $ 160| |

Variable cost | $ 70| |

Break-even (Passengers) | 35,000| BE (Passengers) = Fixed cost/ (Selling price – Variable Cost) = 3,150,000 / 160-70 = 3,150,000 / 90 = 35, 000 | Break-even (Revenue)| $5,625,000| BE (Revenue) = Fixed Cost/Contribution Ratio Contribution Margin Ratio =[(Selling Price per unit – Variable Cost per unit) /Selling price per unit ] = (160-70)/160 = 56%BE Target Sales in $ = (Fixed cost + target income)/ contribution margin ratio = 3,500,000/56% = $5,625,000| Springfield Express needs 35,000 passengers to generate $5.625M in revenue to break-even per month.

b. What is the break-even point in number of passenger train cars per month? Load factor | 70%| |

Capacity of train | 90| |

Break Even (Passenger cars) | 556| BE Passenger Cars = BE Passengers / (Capacity x Load Factor) = 35,000 / (90 x 70%) = 556 | Springfield Express needs 556 passenger cars at 70% capacity to break-even monthly.

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? Fixed cost | 3,150,000| |

Selling price | 190| |

Variable cost | 70| |

Break even (Passengers) | 26,250| BE Passenger Cars = Fixed Cost/ Contribution Margin = 3,150,000 / Selling price per unit – Variable cost per unit = 3,150,000 / 190 – 70 = 3,150,000 / 120 = 26,250| Load factor | 70%| |

Capacity of train | 90| |

Break Even (Passenger cars) | 417| BE Passenger Cars = BE Passengers / (Capacity x Load Factor) = 26,250 / (90 x 70%) = 26,250 /63 = 416.66 |

If Springfield Express raises its average passenger fare to $190, the monthly break-even point will be 417 passenger 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? Fixed cost | 3,150,000| |

Selling price | 160| |

Variable cost | 90| |

Load factor | 70%| |

Capacity of train | 90| |

Break even (Passengers) | 45,000| BE Passengers = Fixed Costs / Contribution Cost = 3,150,000 / (Selling Price per unit – Variable Cost per unit) = 3,150,000 / (160 – 90) = 3,150,000 / 70 = 45,000| Break Even (Passenger cars) | 714| BE Passenger Cars = BE Passengers/ (Capacity x Load Factor) = 45,000 /( 90 x 70%) = 45,000/ 63 = 714.28|

The new break- even point is...