What qualitative factors should be considered by Fairbanks Express in making its decision about… 1 answer below »

(CVP analysis; advanced) Fairbanks Express is a luxury passenger carrier in Alaska. All seats are first class, and the following data are available:

Number of seats per passenger train car

60

Average load factor (percentage of seats filled)

75%

Average full passenger fare

$140

Average variable cost per passenger

$60

Fixed operating cost per month

$2,400,000

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 Fairbanks Express raises its average passenger fare to $170, it is estimated that the load factor will decrease to 60 percent. What will be the monthly 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 $16 per barrel, it is estimated that variable cost per passenger will rise to $80. What would be the new break-even point in passengers and in number of passenger train cars?

e. Fairbanks Express has experienced an increase in variable cost per passenger to $70 and an increase in total fixed cost to $3,000,000. The company has decided to raise the average fare to $160. If the tax rate is 40 percent, how many passengers per month are needed to generate an after-tax profit of $800,000?

f. (Use original data.) Fairbanks Express is considering offering a discounted fare of $100, which the company believes would increase the load factor to 80 percent. Only the additional seats would be sold at the discounted fare. Additional monthly advertising cost would be $160,000. How much pre-tax income would the dis-counted fare provide Fairbanks Express if the company has 40 passenger train cars per day, 30 days per month?

g. Fairbanks 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 $150 on the route, but the load factor would be only 60 percent. Fixed cost would increase by $200,000 per month for additional crew, additional passenger train cars, maintenance, and so on. Variable cost per passenger would remain at $60.

1. Should the company obtain the route?

2. How many passenger train cars must Fairbanks Express operate to earn pre-tax income of $101,000 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 $101,000 per month on this route?

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