Case Study #2

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

Profit = Unit CM * Q – Fixed costs

Q = (Profit + Fixed costs) / Unit CM

Profit = $0

Fixed costs = $3,150,000

Unit CM = Sale price – unit variable cost = $160 - $70 = $90

Q = $3,150,000 / $90 = 35,000 passengers

b. What is the break-even point in number of passenger train cars per month?

Load per car: 70% * 90 = 63 passengers per car

35,000 passengers / 63 passengers per car = 556 cars (rounded-up)

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?

Unit CM = $190 - $70 = $120

Q = $3,150,000 / $120 = 26,250 passengers

Load per car: 60% * 90 = 54

26,250 / 54 = 487 cars (rounded-up)

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?

Unit CM = $160 - $90 = $70

Q = $3,150,000 / $70 = 45,000 passengers

45,000 / 63 = 715 cars (rounded-up)

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?

After-tax income = Profit * (100%-tax rate)

Profit = After-tax income / (100%-tax rate) = $750,000 / 70% = $1,071,428.57

Fixed costs = $3,600,000

Unit CM = $205 - $85 = $120

Q = ($3,600,000 + $1,071,428.57) / $120 = $4,671,428.57 / $120 = 38929 passengers (rounded-up)

f. (Use original data). Springfield Express is considering offering a discounted fare of $ 120, which the company believes would...