Managerial Accounting 505 Case Study Week 3

Grade 45/50 Managerial Accounting 505 Case Study Week 3 A. What is the break-even point in passengers and revenues per month? Total Per UnitPercent Sales: 160 X 90 $14,400$ 160100% Less variable costs/expenses: . 70 X 90 $ 6,300 $7044% Contribution margin: $ 8,100$9056% Less fixed costs/expense: $3,150,000 Net operating income: $3,141,900 8,100 /14,400 = 56% 100 - 56 = 44% BEP in passengers (fixed costs / contribution margin) 3,150,000 / 90 = 35,000 passengers BEP in dollars (passenger per month X selling price) 35,000 X 160 = 5,600,000 B.

What is the break-even point in number of passenger train cars per month? # of seats per passenger train cars X Average load factor BEP in passenger’s car per month 35,000/ (90x. 70) 35,000/ 63 = 556 passenger train per month C. If Springfield Express raises its average passenger fare to $190, it is estimated that the average load factor will decrease to 60%. What will be the monthly break-even point in number of passenger cars? Total Per UnitPercent Selling Price $17,100$190100 Less variable costs/expense$6,300$70 37 Contribution margin$10,800$12063 BEP in passengers (fixed cost / unit cm ) 3,150,000 / 120 = 26,250

BEP in passengers per month in dollars (fixed costs / cm ratio) 3,150,000 / . 63 = 5,000,000 # of seats per passenger train cars X Average load factor 90 X . 60 = 54 BEP # of passengers cars 26,250 / (90 X . 60) 54 = 486 passengers train cars per month 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? BEP in passengers Fixed operating cost /contribution margin 3,150,000/ 70 = 45,000 passengers per month BEP # of passengers per car 90x. 70 = 63 passenger per car Passengers per month/passenger train cars 45,000/63= 714 passenger train cars per month 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? Before tax profit = after-tax profit /100%-tax rate % 750,000/(1. 00-. 30)= $1,071,429

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Before tax profit + fixed cost/New contribution margin $,1,071,429 + $3,600,000/($205-$85) = $4,671,429/$120 = 38928. 56 or 38,929 passenger per month. 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?

Revenue= 90 x (. 80-. 70) x 120 x 50 x 30 + $180,000 = $1,800,000 Variable cost= $70 x ($1,800,000/discount fare ($120) = 1,050,000 Additional monthly advertising cost = $180,000 Revenue…………………………………………………………………………$1,800,000 Less Variable cost………………………………………………………($1,050,000) Contribution Margin…………………………………………… $750,000 Less Advertising cost………………………………………… ($180,000) Pretax income discount fare provide……….. $570,000 f# of discounted seats = 90 X . 0 = 9 seats Contribution margin for discounted fares = $ 120 - $ 70 = $ 50 X 9 discounted seats = $450 each train X 50 train cars per day X 30 days per month= $ 675,000 minus $ 180,000 additional fixed costs = $ 495,000 pretax income. 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. Should the company obtain the route? Revenue= 90 x (. 6) X $175x20= $189,000 Variable cost= $70 x ($189,000/ fare ($175) = $75,600 Additional monthly Fixed cost = $250,000 Revenue…………………………………………………………………………$189,000 Less Variable cost………………………………………………………($75,600) Contribution Margin…………………………………………… $113,400 Less Fixed cost……………………………………………........ ($250,000) Pretax income loss…………………………………………. $136,000) The company should not go for the new route because they will lose money because the Total Additional Contribution Margin is not > Additional Fixed Costs 2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route? Before tax profit + fixed cost/Contribution margin $120,000+$250,000 / ($175-$70) = 3,523. 81 or 3524 # of seats per passenger train cars X Average load factor 90 X . 0 = 54 Passengers per month/passenger train cars 3524/54 = 65. 25 or 65 passenger train cars needed 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? Before tax profit + fixed cost/Contribution margin $120,000+$250,000/($175-$70) = 3,523. 81 or 3524 # of seats per passenger train cars X Average load factor 90 X . 5 = 67. 50 Passengers per month/passenger train cars 3524/67. 50 = 52. 20 or 52 passenger train cars needed 4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route? If fixed cost increased to $500,000 Fixed cost (25,000 X 2) = $500,000 = fixed cost + required profit)/contribution margin per seat = (500000 + 120000) / 61 = 62,0000 / 61 = 10164 Seats

Seat price average (131*10164) 1331484 Variable cost (70*10164) 711480 Contribution 620004 Fixed cost 500000 Income Fixed cost variable cost, contribution margin income loading factors should be considered before taking decision. 4. Springfield should consider such things as •Connections to other Springfield trains that might be made by these passengers. •Long-range potential for increased load factors •Increased customer goodwill in this new market •Increased employment opportunities for labor in the area •Competition in the market. 120004

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