Ac505 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

Formulae’s:
Revenue = Units Sold * Unit price
Contribution Margin = Revenue – All Variable Cost
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
Break Even Point in Units = (Total Fixed Costs + Target Profit) ÷ Contribution Margin
Break Even Point 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. What is the break-even point in passengers and revenues per month?
 Contribution margin = Sales per unit - Variable expenses per unit
= $160 - $70 = $90
 Break-even point in passengers = Fixed costs ÷ Contribution Margin
= 3,150,000 ÷ 90 = 35,000 passengers
 Break-even point in revenues per month = Unit sales to break even X Sales per unit
= 35,000 X $160 = $5,600,000 revenue b. What is the break-even point in number of passenger train cars per month?
 Compute number of seats per train car (remember load factor?)
= (90 X 70%) = 63
 Break-even point in passengers = 35,000 passengers
 Number of cars = 35,000 ÷ 63 = 556 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?
 Contribution margin = $190 – $70 = $120
 Compute number of seats per train car (remember load factor?)
= (90 X 60%) =