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
Formulae’s:
Revenue = Units Sold * Unit price
Contribution Margin = Revenue – All Variable Cost
Contribution Margin Ratio = Contribution Margin ÷ Selling Price
Break Even Point in Units = (Total Fixed Costs + Target Profit) ÷ Contribution Margin
Break Even Point in Sales = (Total Fixed Costs + Target Profit) ÷ Contribution Margin Ratio
Margin of Safety = Revenue -
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(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? Then, proceed to compute number of passengers =?
New Contribution margin = ($160 - $90) *70% * 90 = 4,410
Breakeven Point in Passenger Cars = Fixed Costs ÷ Contribution Margin
= $3,150,000 ÷ 4,410 = 714 Passenger Cars
Break-even point in passengers = $3,150,000 ÷ ($160 - $90) = 45,000 passengers 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?
Profit = After Tax Profit ÷ Tax Rate = $750,000 ÷ 70% = $1,071,429
New Contribution margin = $205 - $85 = $120
Breakeven Point in Passengers = (Fixed Costs + Profit) ÷ Contribution Margin Per Unit
= ($3,600,000 + $1,071,429) ÷ ($205 - $85) = $4,671,429 ÷ $120 = 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.
Springfield Express is a luxury passenger carrier in Texas. All seats are first class, and the following data are available:
Break-even Dollar Volume = Total Fixed Costs / Contribution Margin = $525,000 / 0.7111 = $738,282.40
In order to calculate the breakeven point, we use the following equation and budget data:
| If variable costs increase, but price and fixed costs are held constant, the break even point will decrease.
reach 47,476 units which will result in $166,166 in dollars during the third quarter of our first
A production run of toothpaste requires a fixed cost of $100,000. The variable cost per unit is $3.00. If 50,000 units of toothpaste will be sold during the next month, what sale price must be chosen in order to break even at the end of the month? Note: please report the result as a whole number, rounding if necessary and omitting the decimal point. Answer
Although the financial goal is to create profit, we need to calculate the breakeven point to get started.
If fixed costs increase, but variable cost and price remain the same, the break even point
The financial breakeven point considers how many units it would take in the first year to bring the company’s NVP to zero. To do this, fixed cost (rent included) must be added to the operating cash flow and then divided by the contribution margin. In this case, 30,000 units would need to be sold.
Breakeven Analysis for Product Tylenol Approach 1 - Same price as Tylenol Approach 2a - Cheaper than Tylenol Approach 2b - Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000 6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%
1. Assume that a company is budgeting to sell 2,500 units of a product at a selling price per unit of $32. The variable cost per unit is $26 and total fixed costs are $5,000.
The percentage Breakeven Sales Change can be calculated simply by dividing the unit sales change by the initial sales level, or may be calculated more directly with the following expression:
This method uses simple algebra, and usually focuses on finding the quantity of units that must be manufactured and/or sold, although you may need to find the proper sale price, or less often one of the other variables given instead. The other method for calculating the break-even point is the contribution margin method, which is the same as used by loscostos.info: [Fixed Costs/ (Sales – Variable Costs)] = Break-Even point in units sold. This method will give you how many units to be manufactured to reach zero profit, but can easily be retooled to give the break-even point in revenue. Instead of dividing by the contribution margin, you divide by the contribution margin ratio, which is found by dividing the contribution margin by the sales revenue, which looks like this: (Sales – Variable Costs) / Sales = Contribution Margin Ratio. Calculating the Break-Even point with this method results in this formula: [Fixed Costs / ((Sales – Variable Costs) / Sales)] = Break-Even point in dollars. Finding the Break-Even point in either respect is useful because it tells a company the bottom line in how much product they must sell or how much they must sell their product for in order to cover their expenses. Finding a Target Profit with these equations is as easy as adding your target to the end of the equation or in the
This equation is solved for the sales volume in units. c. In the graphical approach, sales revenue and total expenses are graphed. The break-even point occurs at the intersection of the total revenue and total expense lines. 8-2 The term unit contribution margin refers to the contribution that
Because each product has a different contribution margin percentage, the volume required for each break-even point would be different and will not add up to the company’s overall break-even volume of 1,100,000 units; the overall break-even volume assumes that there is only one contribution margin percentage which is :