Acct505 Case Study 1

Case Study 1

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

Formula :

Revenue = Units Sold * Unit price

Contribution Margin = Revenue – All Variable Cost

Contribution Margin Ratio = Contribution Margin/Selling Price

Break Even Points in Units = (Total Fixed Costs + Target Profit )/Contribution Margin

Break Even Points in Sales = (Total Fixed Costs + Target Profit )/Contribution Margin Ratio

Margin of Safety = Revenue - Break Even Points in Sales

Degree of Operating Leverage = Contribution Margin/Net Income

Net Income = Revenue – Total Variable Cost – Total Fixed Cost

Unit Product Cost using Absorption Cost = (Total Variable Cost + Total Fixed Cost)/# of units

a. Contribution margin per passenger =$160 - $70 = $90 per passenger

Contribution margin ratio = $90 / $160 = .5625

Break-even point in passengers = Fixed costs/Contribution Margin = $3,150,000 / $90

Passengers = 35,000

Break-even point in dollars = Fixed Costs/Contribution Margin Ratio = $3,150,000 / .5625

$5,600,000

b. Compute # of seats per train car (remember load factor?) = 90 x 70% = 63 passengers per train car

If you know # of BE passengers for one train car and the grand total of passengers, you can compute # of train cars (rounded) = 35,000 / 63 = 556 train cars

c. Contribution margin = $190 - $70 = $120

Break-even point in passengers = fixed costs/ contribution margin

Passengers =...