Case Study 1

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

Formula :

Revenue = Units Sold * Unit price

Contribution Margin = Revenue – All Variable Cost

Contribution Margin Ratio = Contribution Margin/Selling Price

Break Even Points in Units = (Total Fixed Costs + Target Profit )/Contribution Margin

Break Even Points 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

a.       Contribution margin per passenger =?

Contribution margin ratio =?

Break-even point in passengers = Fixed costs/Contribution Margin =

Passengers =?

Break-even point in dollars = Fixed Costs/Contribution Margin Ratio =

$ ?

b.      Compute # of seats per train car (remember load factor?)

If you know # of BE passengers for one train car and the grand total of passengers, you can compute # of train cars (rounded) =?

c.        Contribution margin =?

Break-even point in passengers = fixed costs/ contribution margin

Passengers =?

train cars (rounded) =?

d.      Contribution margin =?

Break-even point in passengers = fixed costs/contribution margin

Passengers =?

train cars ( rounded) = ?

e.      Before tax profit less the tax rate times the before tax profit = after-tax income = $ ?

Then, proceed to compute # of passengers -=?

f.        # of discounted seats = ?

Contribution margin for discounted fares  X # discounted seats = $ each train X$ ? train cars per day X ? days per month= $?  minus $ additional fixed costs = $?  pretax income.

g.       1.

Compute Contribution margin

Then,

# seats X $ X # train cars =                                      $            ?

Increased fixed cost                                                             ( ?)

Pretax gain (loss) on new route                                           $

2 and 3.  Compute # of passengers and train cars using computation approaches employed in some of the above problems.

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)