Case Study 2

Case Study 2 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 Formula : Revenue = Units Sold * Unit price

Contribution Margin = Revenue – All Variable Cost Contribution Margin Ratio = Contribution Margin/Selling Price Break Even Points in Units = (Total Fixed Costs + Target Profit )/Contribution Margin Break Even Points in Sales = (Total Fixed Costs + Target Profit )/Contribution Margin Ratio Margin of Safety = Revenue - Break Even Points in Sales Degree of Operating Leverage = Contribution Margin/Net Income Net Income = Revenue – Total Variable Cost – Total Fixed Cost Unit Product Cost using Absorption Cost = (Total Variable Cost + Total Fixed Cost)/# of units a. Contribution margin per passenger =$160 - $70 = $90

Contribution margin ratio =$90/$160=56. 25% Break-even point in passengers = Fixed costs/Contribution Margin = $ 3,150,000/$90 Passengers =35,000 Break-even point in dollars = Fixed Costs/Contribution Margin Ratio = $ 3,150,000/56. 25% $ 5,600,000 b. Compute # of seats per train car (remember load factor? )= 90 * 70% = 63 Seats filled Compute # of train cars (rounded) = 35,000/63 = 556 train cars filled c. Contribution margin = $190 - $70 = $120 Break-even point in passengers = fixed costs/ contribution margin =$ 3,150,000/$120 Passengers = 26,250 BE = 90 seats *60% = 54

Train cars (rounded) = 26,250/54 = 486 d. Contribution margin = $190 - $90 = $70 Break-even point in passengers = Fixed costs/Contribution Margin = $ 3,150,000/$70 Passengers =45,000 BE = 90 seats *70% = 63 Train cars (rounded) = 45,000/63 = 714 e. Contribution margin = $205 - $85 = $120 (P = Passengers) Sales205*P Variable Exp. 085*P Contribution M. 120*P Fixed Exp. 3,600,000 PretaxX Tax Exp. :X*30% Net Income Op. 750,000 750,000 = X – 0. 3X (X (1 – 0. 3) => 750,000/(1-0. 3) = X X=$ 1,071,428. 57 (Pre-Tax) $ 1,071,429= 120P – $ 3,600,000 => $ 1,071,429 + $ 3,600,000= 120P => 4,671,429/120= P P =38,928 f. Contribution margin = $120 - $70 = $50 # of discounted seats = 90*70%; 90*80% ( Difference is 10%; 90*10% = 9 Seats Contribution margin for discounted fares X #discounted seats = $50 * 9 Seats = $450 50 Train *$ 450 train cars per day * 30 days per month= $675,000 $ 675,000 (-) $ 180,000 additional fixed costs = $495,000 pretax income. g. 1. Compute Contribution margin Route 1 Route2 Overall Mix Sales160*P175*P335 *p Variable Exp. 070*P070*P140 *p Contribution M. 090*P105*P195 *P Route 1 Contribution Margin Ratio =$90/$160=56. 5% Route 2 Contribution Margin Ratio =$105/$175=60% Overall Contribution Margin Ratio =$195/$335=58. 20% Answer: Yes, it should, because the CMR is greater with the two routes. 2. BE = 90 * 60% = 54 Seats filled Contribution margin = $175 - $70 = $105 (P = Passengers) Sales175*P (54 Seats) Variable Exp. 070*P Contribution M. 105*P Fixed Exp. 3,150,000+250,000=3,400,000 Pretax120,000 120,000 = (105P*(54 Seats)) - 3,400,000 => 3,520,000 = 5,670P => 3,520,000/5,670 = P P=621 621/54 =12 train cars 3. Contribution margin = $175 - $70 = $105 BE = 90 seats *75% = 68

Contribution margin = $175 - $70 = $105 (P = Passengers) Sales175*P (68 Seats) Variable Exp. 070*P Contribution M. 105*P Fixed Exp. 3,150,000+250,000=3,400,000 Pretax120,000 120,000 = (105P*(68 Seats)) - 3,400,000 => 3,520,000 = 7,140P => 3,520,000/7,140= P P=493 493/68 = 7 train cars 4. Springfield should consider Qualitative factors such as: (1) effect on employee morale, schedules and other internal elements; (2) relationships with and commitments to older and new suppliers; (3) effect on present and future customers; and (4) long-term future effect on profitability and new businesses.