Acct 552 Case Study 1

Norwalk Express is a luxury passenger carrier in Connecticut. All seats are located in first class, and the following data are available:

Number of seats per passenger train car 70

Average load factor (percentage of seats filled) 80%

Average full passenger fee $ 170

Average variable cost per passenger $ 90

Fixed operating cost per month $ 2,700,000

E. Norwalk Express has experienced an increase in variable cost to $100 and an increase in total fixed cost to $3,200,000. The company has decided to raise the average fare to $ 180. If the tax rate is 20 percent, how many passengers per month are needed to generate an after-tax profit of $ 700,000? (Round to the nearest whole dollar and unit.)

F. Norwalk Express is considering offering a discounted fare of $130, which the company believes would increase the load factor to 90 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising costs would be $ 170,000. How much pre-tax income would the discounted fare provide Norwalk Express if the company has 40 passenger train cars per day, 30 days per month?

G. Norwalk Express has an opportunity to obtain a new route that would be traveled 15 times per month. The company believes it can sell seats at $180 on the route, but the load factor would be 60 percent. Fixed costs would increase by $250,000 per month for additional crew, additional passenger train cars, maintenance, and so on. The variable cost per passenger would remain at $90.

1. Should the company obtain the route?

2. How many passenger train cars must Norwalk Express operate to earn a pre-tax income of $120,000 per month on this route? (Round to the nearest whole number.)

3. If the load factor could be increased to 70 percent, how many passenger train cars must be operated to earn a pre-tax income of $120,000 per month on this route? (Round to the nearest whole number.)

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

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