ACC 505 Case Study - Springfield Express
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ACC 505 Case Study - Springfield Express

Course Number: ACC 505, Spring 2012

College/University: DeVry Houston

Word Count: 881

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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 What is the breakeven point in passengers and revenues per month? Breakeven...

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Express Springfield 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 What is the breakeven point in passengers and revenues per month? Breakeven Point in Passengers = Fixed Expenses 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 What is the breakeven point in number of passenger train cars per month? Contribution Margin = (90 * 70%) * 90 = 5670 Breakeven Point in Passenger Cars = Fixed Expenses Contribution Margin Breakeven Point in Passenger Cars = $3,150,000 5,670 Breakeven Point in Passenger Cars = 556 passenger train cars 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 breakeven 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 Expenses Contribution Margin Breakeven Point in Passenger Cars = $3,150,000 6,480 Breakeven Point in Passenger Cars = 486 passenger train cars (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 Expenses 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 Expenses Contribution Margin Per Unit Breakeven Point in Passengers = $3,150,000 ($160 $90) Breakeven Point in Passengers = 45,000 Passengers 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 aftertax 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 Expenses + 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 Breakeven Point in Passengers = 38,929 (Use Passengers 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 pretax 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 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. 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. How many passenger train cars must Springfield Express operate to earn pretax income of $ 120,000 per month on this route? 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 If the load factor could be increased to 75 percent, how many passenger train cars must be operated to earn pretax 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 What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route? 1. The new route may cannibalize existing routes 2. The new routes may be important to a competitor for transfers or operating efficiency on the competitor's train system. 3. What are the elastic effects of a strong or weak economy on these new routes? 4. Are the new employees better than existing employees? 5. Routes may be limited and be valuable because of their scarcity and can be sold in a few years for a great deal of money.

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