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

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

Breakeven Point in Passengers = Fixed Costs ÷ Contribution Margin

Breakeven Point in Passengers = $3,150,000 ÷ ($160 – $70)

Breakeven Point in Passengers = 35,000

Breakeven Point in Revenue = Breakeven Point in Passengers * Average Full Passenger Fare

Breakeven Point in Revenue = 35,000 Passengers * $160

Breakeven Point in Revenue = $5,600,000

b. What is the break-even point in number of passenger train cars per month?
Contribution Margin = (90 * 70%) * 90 = 5670

Breakeven Point in Passenger Cars = Fixed Costs ÷ Contribution Margin

Breakeven Point in Passenger Cars = $3,150,000 ÷ 5,670

Breakeven Point in Passenger Cars = 556 passenger train cars

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?
New Contribution Margin = (Avg Passenger Fare – Avg VCPer Passenger) * Avg Load
Factor * Number of Seats

New Contribution Margin = ($190 - $70) * 60% * 90

New Contribution Margin = $120 *60% * 90

New Contribution Margin = 6,480

Breakeven Point in Passenger Cars = Fixed Cost ÷ Contribution Margin

Breakeven Point in Passenger Cars = $3,150,000 ÷ 6,480

Breakeven Point in Passenger Cars = 486 passenger train cars

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 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?
New Contribution Margin = (Avg Passenger Fare – Avg VC Per Passenger) * Avg Load Factor * Number of
Seats

New Contribution Margin = ($160 - $90) * 70% * 90

New Contribution Margin = $70 * 70% * 90

New Contribution Margin = 4,410

Breakeven Point in Passenger Cars = Fixed Costs ÷ Contribution Margin

Breakeven Point in Passenger Cars = $3,150,000 ÷ 4,410

Breakeven Point in Passenger Cars = 714 Passenger Cars

Breakeven Point in Passengers = Fixed Costs ÷ Contribution Margin Per Unit

Breakeven Point in Passengers = $3,150,000 ÷ ($160 - $90)

Breakeven Point in Passengers = 45,000 Passengers

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?
Profit = After Tax Profit ÷ Tax Rate

Profit = $750,000 ÷ 70%

Profit = $1,071,429

New Contribution Margin Per Passenger = (Avg Passenger Fare – Avg VC Per Passenger)

New Contribution Margin Per Passenger = ($205 - $85)

New Contribution Margin Per Passenger = $120

Breakeven Point in Passengers = (Fixed Costs + Profit) ÷ Contribution Margin Per Unit

Breakeven Point in Passengers = ($3,600,000 + $1,071,429) ÷ ($205 - $85)

Breakeven Point in Passengers = $4,671,429 ÷ $120

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 Breakeven Point in Passengers = 38,929 Passengers

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?
New Contribution Margin Per Passenger = (Avg Passenger Fare – Avg VC Per Passenger)

New Contribution Margin Per Passenger = ($120 - $70)

New Contribution Margin Per Passenger = $50

Additional load factor = New Load Factor – Original Load Factor

Additional load factor = 80% - 70%

Additional load factor = 10%

Contribution Margin of Additional Rides = Addtl Passengers * Addtl Load Factor * Number of Seats

Contribution Margin of Additional Rides = 50 * 10% * 90

Contribution Margin of Additional Rides = 450

Additional Income = (450 * 50 Trains * 30 days) – ($180,000 Advertising costs)

Additional Income = $495,000

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. Should the company obtain the route?
Contribution Margin Per Ride = (Sales Price – VC) * (Number of Passengers * Load Factor)

Contribution Margin Per Ride = ($175 - $70) * (120 * 60%)

Contribution Margin Per Ride = $7,560

Additional Income = (Contribution Margin Per Ride * Number of Rides) – Fixed Costs

Additional Income = ($7,560 * 20) - $250,000

Additional Income = ($98,800)

Do not obtain the route.

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

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 Passenger Cars Needed For Target Profit = (Fixed Costs + Profit) ÷ Contribution Margin Per Train

Passenger Cars Needed For Target Profit = ($250,000 + $120,000) ÷ $7,560

Passenger Cars Needed For Target Profit = 49 Trains

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?
New Contribution Margin = (Avg Passenger Fare – Avg VC Per Passenger) * Avg Load Factor *
Number of Seats

New Contribution Margin = ($175 - $75) * 75% * 120

New Contribution Margin = $105 * 75% * 120

New Contribution Margin = $12,150

Passenger Cars Needed For Target Profit = (Fixed Costs + Profit) ÷ Contribution Margin Per Train

Passenger Cars Needed For Target Profit = ($250,000 + $120,000) ÷ $12,150

Passenger Cars Needed For Target Profit = 30 Trains

4. What qualitative factors should be considered by Springfield Express in making its

decision about acquiring this route?
When Springfield Express is making the decision to offer a new route, I believe that the morale
of the employees should be considered. Since there are not a whole lot of details pertaining to
this new route, it should be a priority of Springfield Express to consider the non-monetary side
of the deal before making the final decision. Some ideas to think about would be: how long is
this route? Is this a route that would be hard to staff with employees? Although these factors are
not factors that can be calculated, they are important qualitative factors that should be
considered. Springfield Express should also consider the competition and what other rail lines
could be offering. I believe that it would be in their best interest to thoroughly research the
market and see what each rail line is offering and how much they are offering it for.

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