Variable Costing Income Statement for a Service Company

East Coast Railroad Company transports commodities among three routes (city-pairs): Atlanta/Baltimore, Baltimore/Pittsburgh, and Pittsburgh/Atlanta. Significant costs, their cost behavior, and activity rates for April are as follows:

Cost	Amount		Cost Behavior		Activity Rate
Labor costs for loading and unloading railcars	$175,582		Variable		$46.00	per railcar
Fuel costs	460,226		Variable		12.40	per train-mile
Train crew labor costs	267,228		Variable		7.20	per train-mile
Switchyard labor costs	118,327		Variable		31.00	per railcar
Track and equipment depreciation	194,400		Fixed
Maintenance	129,600		Fixed
	$1,345,363

Operating statistics from the management information system reveal the following for April:

	Atlanta/ Baltimore		Baltimore/ Pittsburgh		Pittsburgh/ Atlanta		Total
Number of train-miles	12,835		10,200		14,080		37,115
Number of railcars	425		2,160		1,232		3,817
Revenue per railcar	$600		$275		$440

a. Prepare a contribution margin by route report for East Coast Railroad Company for the month of April. Calculate the contribution margin ratio, rounded to one decimal place. If required, use the minus sign to indicate a negative contribution margin.

East Coast Railroad Company
Contribution Margin by Route
For the Month Ended April 30
	Atlanta/Baltimore	Baltimore/Pittsburgh	Pittsburgh/Atlanta	Total
Revenues	$	$	$	$
Variable costs:
Labor costs for loading and unloading railcars	$	$	$	$
Fuel costs
Train crew labor costs
Switchyard labor costs
Total variable costs	$	$	$	$
Contribution margin	$	$	$	$
Contribution margin ratio	%	%	%	%

Feedback

a. Calculate: Revenues = revenue per railcar x number of railcars Variable costs: Labor costs for loading = $46 x number of railcars Fuel costs = $12.40 x number of train-miles Train crew labor costs = $7.20 x number of train-miles Switchyard labor = $31 x number of railcars Then prepare contribution margin analysis as: Revenues - Variable costs = Contribution Margin To calculate the contribution margin ratio, divide the contribution margin by revenues.

Learning Objective 4 and Learning Objective 6.

b. Evaluate the route performance of the railroad using the report in (a).

The route performs significantly worse than do the other two routes. A close examination of the operating statistics indicates that this route runs railcars, combined with fairly total mileage. This combination suggests that the railroad is running many trains on the railroad. That is, the railroads profitability is sensitive to the size, or length, of the train in railcar terms.