a. What is the break-even point in passengers and revenues per month?

Fixed cost = 3,150,000

160x = 70x + 3,150,000

90x = 3,150,000

X = 35,000 passengers – breakeven

Break even revenue = 35,000 x 160 = 5,600,000

b. What is the break-even point in number of passenger train cars per month?

At 70% load = 90×0.7 = 63

Breakeven per car = 35,000 / 63 = 556

c. 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 break-even point in number of passenger cars?

Sale price = 190

190x = 70x + 3,150,000

X = 26,250 breakeven passengers

At 60% load = 90×0.6 = 54

Breakeven cars = 26,250 / 54 = 486

d. (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 variable cost = 90 per passenger

160x = 90x + 3,150,000

X = 45,000 breakeven passengers

At 70% load = 90×0.7 = 63

Breakeven cars = 45,000 / 63 = 714 cars

e. 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 after-tax profit of $ 750,000?

After tax profit = 750,000

Then before tax profit: (let profit = y)

y – 0.3y = 750,000

y = 1,071,429

1,071,429 = Sales – Cost

1,071,429 = 205x – (85x + 3,600,000)

1,071,429 = 205x – 85x – 3,600,000

120x = 4,671,429

X = 38,929 passengers

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?

Total seats occupied by 70% load = 50x90x 0.7 = 3,150

Seats occupied by extra load = 50x90x0.1 = 450

Per day Revenue

(3,150×160) + (450×120) = 558,000

Variable Costs per day = 70×3,600 = 252,000

Income per day = 558,000 – 252,000 = 306,000

Income per month = 306,000×30 = 9,180,000

Profit = 9,180,000 – 3,150,000 – 180,000 = 5,850,000

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.

Total seats occupied by 70% load = 50x90x 0.7 = 3,150

Seats occupied by extra load = 50x90x0.1 = 450

Per day Revenue

(3,150×160) + (450×120) = 558,000

Variable Costs per day = 70x 3,600 = 252,000

Income per day = 558,000 – 252,000 = 306,000

Income per month = 306,000×30 = 9,180,000

Profit = 9,180,000 – 3,150,000 – 180,000 = 5,850,000

1. Should the company obtain the route?

The company should obtain the route if there are more than 2,380 passengers on this route every month. 120,000 = 175x – 70x – 250,000

X = 3,524 passengers

At 60% load = 90×0.6 = 54

Passenger cars = 3,524 / 54 = 65

2. How many passenger train cars must Springfield Express operate to earn pre-tax income of $ 120,000 per month on this route?

120,000 = 175x – 70x – 250,000

X = 3,524 passengers

At 60% load = 90×0.6 = 54

Passenger cars = 3,524 / 54 = 65

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?

At 75% load = 90×0.75 = 67.5

Passenger cars = 3,524 / 67.5 = 52

4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?

Springfield Express may need to consider broadening their clientele base, and creating a business class or an economy train to bolster their contribution margin. They need to explore the number of people who actually travel by train rather than by airline, and of that how many can afford first class accommodations. Even one step further, can those who live along the start and stop point of the route able to afford first class tickets?

Springfield Express needs to consider existing competition along this proposed route, and account for any increased marketing needed to woo passengers from other train lines. Also will there be any introductory fares as temptation to ride Springfield Express rather than the other lines?

Will there be any required maintenance to the existing track, can the existing rail cars travel on the established track?