Ac505 Case Study 2 Essay

917 Words Oct 4th, 2012 4 Pages
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 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

Formulae’s:
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 -
…show more content…
 New Contribution margin = $120 - $70 = $50
 Additional Load Factor = 80% - 70% = 10%
 Contribution Margin of Additional Riders = Additional (Passengers * Load Factor) * Number of Seats = 50 * 10% * 90 = 450
 Additional Income = (450 * 50 Trains * 30 days) – ($180,000 Advertising costs) = $495,000

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. Assuming 90 passenger per car

1. Should the company obtain the route?
 Contribution Margin Per Ride = (Sales Price – Variable Cost) * (Number of Passengers * Load Factor) = ($175 - $70) * (90 * 60%) = $5,670
 Additional Income = (Contribution Margin Per Ride * Number of Rides) – Fixed Costs
= ($5,670 * 20) - $250,000 = ($136,600) Do NOT obtain the route…

2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route?
 Passenger Cars Needed For Target Profit = (Fixed Costs + Profit) ÷ Contribution Margin Per = ($250,000 + $120,000) ÷ $5,670 = 66 Cars

3. If the load factor could be increased to 75

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