560 words - 3 pages

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

$90/$160=56.25% $3,150,000/0.5625=$5,600,000

b.What is the break-even point in number of passenger train cars per month? 90*70%=63

35,000/63=555.55

c.If Springfield Express raises its average passenger fare to $ 190, it is estimated that the average load factor will decrease to 60

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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 $

70.

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

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?

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.

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