Running head: ACC 505: SPRINGFIELD EXPRESS CASE STUDY

ACC 505: Managerial Accounting Case Study 1 Vitor Queiroz Keller Graduate School of Management Dr. Linval Frazer July 27, 2013

ACC 505: SPRINGFIELD EXPRESS CASE STUDY 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. What is the break-even point in passengers and revenues per month?

-At Springfield Express, for every fare costing $160 per passenger there will be a variable cost of $70. So order to find the break-even point in passengers we first need to calculate the contribution margin per passenger which is: Contribution margin per passenger= Average full passenger fare - Average variable cost per passenger Contribution margin per passenger =$160-$70= $90. -Having the contribution margin per passenger of $90 dollars handy, we can now find the breakeven point in passengers which is: Break-even point in passengers= Fixed expenses/ contribution margin per passenger=$3,150,000/$90= 35000 passengers In order to break-even Springfield Express needs to sell to a number of 35,000 passengers -Having the break-even points in passengers we can now calculate the break-even points in revenue. Since we know that we need 35000 passengers buying a full fare of $160 dollars the break-even point in revenue is: Break-even point in revenue= Break-even point in passengers x Average full passenger fare Break-even point in revenue= 35000x $160= $5,600,000 Another way of calculating this would be finding the Contribution margin ratio. CM ratio= Contribution margin per passenger/Average full passenger fare= 90/160= 0.5625 or (0.5625 x100)= 56.25% Break-even point in revenue= Fixed expenses/CM ratio= $3,150,000/0.5625= $5,600,000

ACC 505: SPRINGFIELD EXPRESS CASE STUDY Springfield Express needs a revenue of $5,600,000 to break even.

b. What is the break-even point in number of passenger train cars per month? To find the break-even point in number of passenger train cars per month we need to compute the number of seats per train car as per the average load factor as in percentage of seats filled (70%). Then we need to divide the number of passengers needed to break even (35,000) for that number . Break-even point in number of passenger train cars= number of seats per passenger train car x the average load factor as in percentage of seats filled= 90 x 0.7= 63

Break-even point in number of passenger train cars= Break-even point in passengers/ average load factor 70%= 35,000/63= 555.5 or 556 The break-even point in number of passenger train cars per month is 556 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?

Since the average passenger fair increased from $160 to $190 we need to re-calculate the Contribution margin per passenger Contribution margin per passenger= Average full passenger fare - Average variable cost per passenger= $190-70= $120 Break-even point in passengers= Fixed expenses/ contribution margin per passenger=$3,150,000/$120= 26,250 passengers Break-even point in number of passenger train cars= number of seats per passenger train car x the average load factor as in percentage of seats filled= 90 x 0.6= 54 Break-even point in number of passenger train cars= Break-even point in passengers/ average load factor 60%= 26,250/54= 486.1 or 486 The break-even point in number of passenger train cars per month is 486 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?

ACC 505: SPRINGFIELD EXPRESS CASE STUDY Since variable cost per passenger rose from $70 to $90, the Contribution margin per passenger will not be the same Contribution margin per passenger= Average full passenger fare - Average variable cost per passenger= $160-90= $70 Break-even point in passengers= Fixed expenses/ contribution margin per passenger=$3,150,000/$70= 45000 passengers The break-even point in number of passengers is 45000 Break-even point in number of passenger train cars= number of seats per passenger train car x the average load factor as in percentage of seats filled= 90 x 0.7= 63 Break-even point in number of passenger train cars= Break-even point in passengers/ average load factor 70%= 45000/63= 714.2 or 714 The break-even point in number of passenger train cars per month is 714 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? 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% $205 $85 $3,600,000

Contribution margin per passenger= Average full passenger fare - Average variable cost per passenger= $205-85= $120 The After tax profit is S750,000. We need to calculate the before tax in order to find the number of passengers Before tax profit= After tax profit/percentage tax rate= 750,000/(1-0.3)= 1,071,429 Before the 30% tax the profit is 1,071,429 To find the number of passengers we will use the equation: Profit = Unit CM Q Fixed expenses 1,071,429= 120Q -3600000 120Q= 1,071,429 + 3,600,000

ACC 505: SPRINGFIELD EXPRESS CASE STUDY Q= 4,671,429/120= 38,928,5 The number of passengers per month needed to generate an after-tax profit of $ 750,000 is 38,929

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? Contribution margin per discount passenger= Average full passenger fare - Average variable cost per passenger= 120-70=50 Number of seats at 10%= Number of seats per passenger train car x Contribution margin per passenger x load factor of 70%= 90x50x0.1= 450 Pre-tax income= (Contribution margin per discount passengers x Number of seats at 10%) x 30 Additional monthly advertising cost= (50x450)30-180,000= 675000-180000= $495,000 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? The answer is $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? No, because even with the increase in the fair it would not be worth to take the route. They would need more cars to break even and they only have 20 travels a month 2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $120,000 per month on this route? Profit = Unit CM x Q- fixed expenses= 250,000+120,000 / (.6 x 90) x (175 - 70) = 65 65 train cars are needed to have a pre-tax income per month on this route

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?

ACC 505: SPRINGFIELD EXPRESS CASE STUDY Profit = Unit CM x Q- fixed expenses = 250,000 +120,000 / (.75x 90) x (105)= 53 53 train cars are needed to have a pre-tax income per month on this route 4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?

The relationship Cost, volume, profit. They should see if it is worth to take this route at this price. Even though the price was raise to 175. Also the volume was reduced since they will only be traveling 20 times a month and the fixed costs now are much more than before. In addition to the volume change the 20 trips a month will carry a load of only 60% as oppose to 70%. I think they should consider all these things prior to making a decision.