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
Average load factor (percentage of seats filled)
Average full passenger fare
Average variable cost per passenger
Fixed operating cost per month

90
70%
$ 160
$ 70
$3,150,000

a.
Variable cost per Passenger= $70
Full Fair per Passenger= $160
Contribution margin = $ 160- $ 70 = $ 90 per passenger
Contribution margin ratio = $ 90/$160 = 56.25%
Break-even point in passengers = Fixed costs/Contribution Margin =$ 3,150,000/$ 90 per
passenger = 35,000 passengers Break-even point in dollars = Fixed Costs/Contribution Margin
Ratio=$ 3,150,000/0.5625 = $ 5,600,000.
b.
Average load factor=70% of 90
90 X 0.70 =63 seats per train car
35,000/ 63 = 556 train cars (rounded)

d.

f.

Contribution margin = $ 160 - $ 90 = $ 70 per passenger

Break-even point in passengers = fixed costs/contribution margin=
$ 3,150,000/ $ 70 per passenger = 45,000 passengers
45,000/ 63 = 714 train cars (rounded)

Springfield Express has experienced an increase in variable cost per passenger to $ 85 and an increase
Average load factor=70% of 90 =63
Load factor of 80%= 72 Additional load factor =72-63=9
New fixed costs= 3,150,000+180,000 =3,330,000
Sale per day =50<(63*160) + (120*9)> =558,000
Sales per month=558,000*30=16,740,000
Variable cost per car=70*72=5040
Variable cost per month=252,000*30=7,560,000
CM=Sales-variable costs 16,740,000-7,560,000=9,180, 000
Profit=CM-Fixed Expenses
9,180,000-3,330,000=5,850,000

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.
1.

No they should not obtain the additional route

2.

How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000
per month on this route?
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?
Acquiring this route?

3.

New load factor=60% of 90=54

Profit=cm ratio*sales-fixed expenses
New fixed costs=3,150,000+250,000=3,400,000
CM=175-70=105
CM ratio=0.6
120,000 = 0.6*sales-3,400,000
Sales=5,866,667/175=33,524
1 car =54 passengers
33,524 will fill up 33,524/54=621 cars
New load=75% of 90 =68 passengers
For 120,000 you need 33,524 passengers
With 68 passengers you need
=33,524/68=493 car
4. Springfield should consider such things as (Think of qualitative factors that are important. In
the numbers but other things that have to be considered, e.g., risks)

other words, not

1. What if the passengers do not purchase the tickets?

2. The cost of having more trains will increase overhead cost
3. More trains and passengers will need additional employees that will also increase the overhead. In addition the
feelings of the employees with more shifts that may be added if more employees are not hired
4. Effect on customers present and future with growth of the company