Managerial Accounting 505 Case Study Week 3

Grade 45/50 Managerial Accounting 505 Case Study Week 3 A. What is the break-even point in passengers and revenues per month? Total Per UnitPercent Sales: 160 X 90 $14,400$ 160100% Less variable costs/expenses: . 70 X 90 $ 6,300 $7044% Contribution margin: $ 8,100$9056% Less fixed costs/expense: $3,150,000 Net operating income: $3,141,900 8,100 /14,400 = 56% 100 – 56 = 44% BEP in passengers (fixed costs / contribution margin) 3,150,000 / 90 = 35,000 passengers BEP in dollars (passenger per month X selling price) 35,000 X 160 = 5,600,000 B.What is the break-even point in number of passenger train cars per month? # of seats per passenger train cars X Average load factor BEP in passenger’s car per month 35,000/ (90x. 70) 35,000/ 63 = 556 passenger train per month C. If Springfield Express raises its average passenger fare to $190, it is estimated that the average load factor will decrease to 60%. What will be the monthly break-even point in number of passenger cars? Total Per UnitPercent Selling Price $17,100$190100 Less variable costs/expense$6,300$70 37 Contribution margin$10,800$12063 BEP in passengers (fixed cost / unit cm ) 3,150,000 / 120 = 26,250BEP in passengers per month in dollars (fixed costs / cm ratio) 3,150,000 / . 63 = 5,000,000 # of seats per passenger train cars X Average load factor 90 X . 60 = 54 BEP # of passengers cars 26,250 / (90 X . 60) 54 = 486 passengers train cars per month 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? BEP in passengers Fixed operating cost /contribution margin 3,150,000/ 70 = 45,000 passengers per month BEP # of passengers per car 90x. 70 = 63 passenger per car Passengers per month/passenger train cars 45,000/63= 714 passenger train cars per month E. Springfield Expres s 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? Before tax profit = after-tax profit /100%-tax rate % 750,000/(1. 00-. 30)= $1,071,429Before tax profit + fixed cost/New contribution margin $,1,071,429 + $3,600,000/($205-$85) = $4,671,429/$120 = 38928. 56 or 38,929 passenger per month. 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?Revenue= 90 x (. 80-. 7 0) x 120 x 50 x 30 + $180,000 = $1,800,000 Variable cost= $70 x ($1,800,000/discount fare ($120) = 1,050,000 Additional monthly advertising cost = $180,000 Revenue†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦$1,800,000 Less Variable cost†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦($1,050,000) Contribution Margin†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ $750,000 Less Advertising cost†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ ($180,000) Pretax income discount fare provide†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. $570,000 f# of discounted seats = 90 X . 0 = 9 seats Contribution margin for discounted fares = $ 120 – $ 70 = $ 50 X 9 discounted seats = $450 each train X 50 train cars per day X 30 days per month= $ 675,000 minus $ 180,000 additional fixed costs = $ 495,000 pretax income. 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? Revenue= 90 x (. 6) X $175Ãâ€"20= $189,000 Variable cost= $70 x ($189,000/ fare ($175) = $75,600 Additional monthly Fixed cost = $250,000 Revenue†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦$189,000 Less Variable cost†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦($75,600) Contribution Margin†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦ $113,400 Less Fixed cost†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.. ($250,000) Pretax income loss†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦. $136,000) The company should not go for the new route because they will lose money because the Total Additional Contribution Margin is not > Additional Fixed Costs 2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route? Before tax profit + fixed cost/Contribution margin $120,000+$250,000 / ($175-$70) = 3,523. 81 or 3524 # of seats per passenger train cars X Average load factor 90 X . 0 = 54 Passengers per month/passenger train cars 3524/54 = 65. 25 or 65 passenger train cars needed 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? Before tax profit + fixed cost/Contribution margin $120,000+$250,000/($175-$70) = 3,523. 81 or 3524 # of seats per passenger train cars X Average load factor 90 X . 5 = 67. 50 Passengers per month/passenger train cars 3524/67. 50 = 52. 20 or 52 passenger train cars needed 4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route? If fixed cost increased to $500,000 Fixed cost (25,000 X 2) = $500,000 = fixed cost + required profit)/contribution margin per seat = (500000 + 120000) / 61 = 62,0000 / 61 = 10164 SeatsSeat price average (131*10164) 1331484 Variable cost (70*10164) 711480 Contribution 620004 Fixed c ost 500000 Income Fixed cost variable cost, contribution margin income loading factors should be considered before taking decision. 4. Springfield should consider such things as †¢Connections to other Springfield trains that might be made by these passengers. †¢Long-range potential for increased load factors †¢Increased customer goodwill in this new market †¢Increased employment opportunities for labor in the area †¢Competition in the market. 120004