Amanda Boor

Case Study 1
Accounting 505
November 10, 2014
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

90
70%
$ 160
$ 70
$3,150,000

a. What is the break-even point in passengers and revenues per month?

Variable cost per Passenger= $70
Full Fair per Passenger= $160
Contribution margin = $ 160- $ 70 = $ 90 per passenger
Contribution margin ratio = $ 90/$160 = 56.25%
Break-even point in passengers = Fixed costs/Contribution Margin =$
3,150,000/$ 90 per passenger = 35,000 passengers Break-even point in dollars =
Fixed Costs/Contribution Margin Ratio=$ 3,150,000/0.5625 = $ 5,600,000.
b. What is the break-even point in number of passenger train cars per month?
Average load factor=70% of 90
90 X 0.70 =63 seats per train car
35,000/ 63 = 556 train cars (rounded)
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?
CM = $190 - $ 70 = $120 per passenger
90 X .60 = 54 filled seats
Break-even point in passengers = fixed costs/ contribution margin
=$ 3,150,000/$120 = 26,250 passengers
26,250/54 = 486 train cars (rounded)

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 per passenger
Break-even point in passengers = fixed costs/contribution margin=
$ 3,150,000/ $ 70 per passenger = 45,000 passengers
45,000/ 63 = 714 train cars (rounded)
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?
Profit=CM ratio*sales-fixed expenses
Unit CM=205-85=120
CM ratio=120/205=0.5854
750,000=0.5854*sales-3,600,000 Sales =
(750,000+3,600,000)/0.5854 Sales= 7,430,816
If it cost one passenger 205, then how many would be needed to
generate7,430,816 =
7,430,816/205=
36,248 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?
Average load factor=70% of 90 =63
Load factor of 80%= 72 Additional load factor =72-63=9
New fixed costs= 3,150,000+180,000 =3,330,000
Sale per day =50<(63*160) + (120*9)> =558,000
Sales per month=558,000*30=16,740,000
Variable cost per car=70*72=5040
Variable cost per month=252,000*30=7,560,000
CM=Sales-variable costs 16,740,000-7,560,000=9,180, 000
Profit=CM-Fixed Expenses
9,180,000-3,330,000=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.
1. No they should not obtain the additional route
2. How many passenger train cars must Springfield Express operate to earn pre-tax
income of $ 120,000 per month on this route?
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?
Acquiring this route?
New load factor=60% of 90=54
Profit=cm ratio*sales-fixed expenses
New fixed costs=3,150,000+250,000=3,400,000
CM=175-70=105
CM ratio=0.6
120,000 = 0.6*sales-3,400,000
Sales=5,866,667/175=33,524
1 car =54 passengers
33,524 will fill up 33,524/54=621 cars
New load=75% of 90 =68 passengers
For 120,000 you need 33,524 passengers
With 68 passengers you need
=33,524/68=493 car
4. Springfield should consider such things as (Think of qualitative factors that are important. In
other words, not the numbers but other things that have to be considered, e.g., risks)
1. What if the passengers do not purchase the tickets?
2. The cost of having more trains will increase overhead cost
3. More trains and passengers will need additional employees that will also increase the
overhead. In addition the feelings of the employees with more shifts that may be added if more
employees are not hired
4. Effect on customers present and future with growth of the company