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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? -At Springfield Express,
for every fare costing $160 per passenger there will be a variable cost of $70. So
order to find the break-even point in passengers we first need to calculate the
contribution margin per passenger which is: Contribution margin per passenger=
Average full passenger fare - Average variable cost per passenger Contribution
margin per passenger =$160-$70= $90. -Having the contribution margin per
passenger of $90 dollars handy, we can now find the break-even point in
passengers which is: Break-even point in passengers= Fixed expenses/ contribution
margin per passenger=$3,150,000/$90= 35000 passengers
In order to break-even Springfield Express needs to sell to a number
of 35,000 passengers
-Having the break-even points in passengers we can now calculate the breakeven points in revenue. Since we know that we need 35000 passengers buying a full
fare of $160 dollars the break-even point in revenue is: Break-even point in
revenue= Break-even point in passengers x Average full passenger fare Break-even
point in revenue= 35000x $160= $5,600,000 Another way of calculating this would
be finding the Contribution margin ratio. CM ratio= Contribution margin per
passenger/Average full passenger fare= 90/160= 0.5625 or (0.5625 x100)= 56.25%
Break-even point in revenue= Fixed expenses/CM ratio= $3,150,000/0.5625=
$5,600,000
Since the average passenger fair increased from $160 to $190 we need to recalculate the Contribution margin per passenger Contribution margin per
passenger= Average full passenger fare - Average variable cost per passenger=
$190-70= $120 Break-even point in passengers= Fixed expenses/ contribution
margin per passenger=$3,150,000/$120= 26,250 passengers Break-even point in
number of passenger train cars= number of seats per passenger train car x the
average load factor as in percentage of seats filled= 90 x 0.6= 54 Break-even point
in number of passenger train cars= Break-even point in passengers/ average load
factor 60%= 26,250/54= 486.1 or 486
The break-even point in number of passenger train cars per month is
486
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?
ACC 505: SPRINGFIELD EXPRESS CASE STUDY 4 Since variable cost per
passenger rose from $70 to $90, the Contribution margin per passenger will not be
the same Contribution margin per passenger= Average full passenger fare Average variable cost per passenger= $160-90= $70 Break-even point in
passengers= Fixed expenses/ contribution margin per passenger=$3,150,000/$70=
45000 passengers
The break-even point in number of passengers is 45000
Break-even point in number of passenger train cars= number of seats per
passenger train car x the average load factor as in percentage of seats filled= 90 x
0.7= 63 Break-even point in number of passenger train cars= Break-even point in
passengers/ average load factor 70%= 45000/63= 714.2 or 714
The break-even point in number of passenger train cars per month is
714
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? Number of seats per passenger train car 90 Average load factor
(percentage of seats filled) 70% Average full passenger fare $205 Average variable
cost per passenger $85 Fixed operating cost per month $3,600,000 Contribution
margin per passenger= Average full passenger fare - Average variable cost per
passenger= $205-85= $120 The After tax profit is S750,000. We need to calculate
the before tax in order to find the number of passengers Before tax profit= After tax
profit/percentage tax rate= 750,000/(1-0.3)= 1,071,429 Before the 30% tax the
profit is 1,071,429 To find the number of passengers we will use the equation:
Profit = Unit CM Q
Fixed expenses
1,071,429= 120Q -3600000 120Q= 1,071,429 + 3,600,000
would need more cars to break even and they only have 20 travels a
month
2. How many passenger train cars must Springfield Express operate to earn
pre-tax income of $120,000 per month on this route? Profit = Unit CM x Q- fixed
expenses= 250,000+120,000 / (.6 x 90) x (175 - 70) = 65
65 train cars are needed to have a pre-tax income 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?