##### Question

# Case Study 2: Springfield Express

Case Study 2

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?

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

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 themonthly break-even point in number of passenger cars?

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 perpassenger will rise to $ 90. What will be the new break-even point in passengers and in number of passenger train 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 decidedto 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?

f. (Use original data). Springfield Express is considering offering a discounted fare of $ 120, which the company believes would increase the load factor to 80percent. 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 thediscounted fare provide Springfield Express if the company has 50 passenger train cars per day, 30 days per month?

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 theroute, 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 thisroute?

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