ACCT505
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keller_acct505_managerial_accounting.zipCase Study 1 Week 3-Instructions.doc
Case Study 1
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 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 $ 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?
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?
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. Additional monthly advertising cost would be $ 180,000. How much pre-tax income would the discounted 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 the route, 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 this route?
4. What qualitative factors should be considered by Springfield Express in making its decision about acquiring this route?
Copy of Project A Excel Template.xlsx
Project A Case 9-30
| PROJECT A - Case 9-30 | ||||||
| Student Name: | ||||||
| SALES BUDGET: | ||||||
| April | May | June | Quarter | |||
| Budgeted unit sales | ||||||
| Selling price per unit | ||||||
| Total Sales | ||||||
| SCHEDULE OF EXPECTED CASH COLLECTIONS: | ||||||
| April | May | June | Quarter | |||
| February sales | ||||||
| March sales | ||||||
| April sales | ||||||
| May sales | ||||||
| June sales | ||||||
| Total Cash Collections | ||||||
| MERCHANDISE PURCHASES BUDGET: | ||||||
| April | May | June | Quarter | |||
| Budgeted unit sales | ||||||
| Add desired ending inventory | ||||||
| Total needs | ||||||
| Less beginning inventory | ||||||
| Required purchases | ||||||
| Cost of purchases @ $4 per unit | ||||||
| BUDGETED CASH DISBURSEMENTS FOR MERCHANDISE PURCHASES: | ||||||
| April | May | June | Quarter | |||
| Accounts payable | ||||||
| April purchases | ||||||
| May purchases | ||||||
| June purchases | ||||||
| Total cash payments | ||||||
| EARRINGS UNLIMITED | ||||||
| CASH BUDGET | ||||||
| FOR THE THREE MONTHS ENDING JUNE 30 | ||||||
| April | May | June | Quarter | |||
| Cash balance | ||||||
| Add collections from customers | ||||||
| Total cash available | ||||||
| Less Disbursements | ||||||
| Merchandise purchases | ||||||
| Advertising | ||||||
| Rent | ||||||
| Salaries | ||||||
| Commissions | ||||||
| Utilities | ||||||
| Equipment purchases | ||||||
| Dividends paid | ||||||
| Total Disbursements | ||||||
| Excess (deficiency) of receipts | ||||||
| over disbursements | ||||||
| Financing: | ||||||
| Borrowings | ||||||
| Repayments | ||||||
| Interest | ||||||
| Total financing | ||||||
| Cash balance, ending | ||||||
| EARRINGS UNLIMITED | ||||||
| BUDGETED INCOME STATEMENT | ||||||
| FOR THE THREE MONTHS ENDED JUNE 30 | ||||||
| Sales | - 0 | |||||
| Variable expenses: | ||||||
| Cost of goods sold | - 0 | |||||
| Commissions | - 0 | - 0 | ||||
| Contribution Margin | - 0 | |||||
| Fixed expenses: | ||||||
| Advertising | - 0 | |||||
| Rent | - 0 | |||||
| Salaries | - 0 | |||||
| Utilities | - 0 | |||||
| Insurance | - 0 | |||||
| Depreciation | - 0 | - 0 | ||||
| Net operating income | - 0 | |||||
| Interest expense | - 0 | |||||
| Net income | - 0 | |||||
| EARRINGS UNLIMITED | ||||||
| BUDGETED BALANCE SHEET | ||||||
| JUNE 30 | ||||||
| Assets: | ||||||
| Cash | ||||||
| Accounts receivable (see below) | ||||||
| Inventory | ||||||
| Prepaid insurance | ||||||
| Property and equipment, net | ||||||
| Total assets | ||||||
| Liabilities and Stockholders' Equity | ||||||
| Accounts payable, purchases | ||||||
| Dividends payable | ||||||
| Capital stock | ||||||
| Retained earnings (see below) | ||||||
| Total liabilities and stockholders' equity | ||||||
| Accounts receivable at June 30: | ||||||
| May sales x ?% | ||||||
| June sales x ?% | ||||||
| Total | ||||||
| Retained earnings at June 30: | ||||||
| Balance, March 31 | ||||||
| Add net income | ||||||
| Total | ||||||
| Less dividends declared | ||||||
| Balance, June 30 | ||||||
Sheet2
Sheet3
Project B Instructions.docx
Capital Budgeting Decision
These instructions can also be downloaded from DocSharing!!
Due by Tuesday of week 8, midnight, Mountain Time
Here is Part B:
Clark Paints: The production department has been investigating possible ways to trim total production costs. One possibility currently being examined is to make the paint cans instead of purchasing them. The equipment needed would cost $200,000 with a disposal value of $40,000 and would be able to produce 5,500,000 cans over the life of the machinery. The production department estimates that approximately 1,100,000 cans would be needed for each of the next five years.
The company would hire three new employees. These three individuals would be full-time employees working 2,000 hours per year and earning $12.00 per hour. They would also receive the same benefits as other production employees, 18% of wages in addition to $2,500 of health benefits.
It is estimated that the raw materials will cost 25¢ per can and that other variable costs would be 5¢ per can. Since there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted.
It is expected that cans would cost 45¢ per can if purchased from the current supplier. The company's minimum rate of return (hurdle rate) has been determined to be 12% for all new projects, and the current tax rate of 35% is anticipated to remain unchanged. The pricing for a gallon of paint as well as number of units sold will not be affected by this decision. The unit-of-production depreciation method would be used if the new equipment is purchased.
Required:
1. Based on the above information and using Excel, calculate the following items for this proposed equipment purchase:
· Annual cash flows over the expected life of the equipment
· Payback period
· Annual rate of return
· Net present value
· Internal rate of return
2. Would you recommend the acceptance of this proposal? Why or why not. Prepare a short double spaced Word paper elaborating and supporting your answer.
