Case Study Two
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? $3,150,000/$90.00=35,000 passengers
b.What is the break-even point in number of passenger train cars per month? 90*70%=63
c.If Springfield Express raises its average passenger fare to $ 190, it is estimated that the average load factor will decrease to 60
...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?
(1071428.6+3600)/ (205-85)=8959 passengers
f.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? ((((90 x .8) - (90 x .7)) x (120 - 70)) x (50 x 30)) - 180000 = 495000
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 $
1. Should the company obtain the route?
2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this
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?
4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?
1 No, they would need more passengers and cars to break even each month thus taking them longer to profit.