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
a. What is the break-even point in passengers and revenues per month?
Passengers = Q
160Q = 70Q + ...view middle of the document...
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?
Profit before taxes = Profit after taxes
(1 - Tax rate)
750,000 = 1071429
(1 - .30)
Passengers = Q
205Q = 85Q + $3,600,000 + 1071429
120 = 4,671,429
Q = 38929
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?
Number of trains in a month 1500 * Passengers per train 90 = 135,000
135,000 * 10% load factor increase = 13,500
Increase in Passenger = 13,500
(13,500 * 120) – (13,500 * 70) – 180,000
Increase in Pre-Tax Income = $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?
The company should not obtain the route because there is a loss of $136,000 per month.
(1080* $175) – (1080 * $70) – 250,000 = -136,600
2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route?
175Q = 70Q + 250,000 +120,000
Q = 3524
3524 = 65
90 * 60%
The company should operate 65 cars in order to earn pre-tax income of $ 120,000 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?
3524 = 52
90 * 75%
The company should operate 52 cars in order to earn pre-tax income of $ 120,000 per month on this route
4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?
a. Effect on present and future customers
b. The revenues of other route are not affected by this route.