Case Study 1 Week 3

Case Study 1

3/20/2014

"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

"

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?

contribution margin $160.00 - 70 = $90.00

contribution margin ratio 90 / 160 = 56%

break-even point in passengers 3,150,000 / 90 = 35,000

break-even point in dollars 3,150,000 / 56% = $5,600,000.00

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

Number of seats per cart 90.0 * 70% = 63.0

break evens point in # of passenger train car per mos. 35,000.0 / 63.0 = 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?

new contribution margin 190.0 - 70.0 = 120.0

New break-even point in passenger 3,150,000.0 / 120.0 = 26,250.0

New number of seats 90.0 * 60% = 54.0

New break evens point in # of passenger train car per mos. 26,250.0 / 54.0 = 486

D. What will be the new break-even point in passengers and in number of passengers train cars? Crude oil increase by $20 per barrel estimated variable cost per passenger will rise to $90

new contribution margin 160.0 - 90.0 = 70.0

New break-even point in passenger 3,150,000.0 / 70.0 = 45,000.0

New number of seats 90.0 * 70% = 63.0

New break evens point in # of passenger train car per mos. 45,000.0 / 63.0 = 714

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?