group work ma1 group 7 ann arbor railroad company case

contract $700,000 per month$8 per passengerTable 2: Ann Arbor Railroad — Projected business for March 20X0.VOLUME Slow-Speed High-Speed... What is the projected profitability per passeng

H C VI N TÀI CHÍNH Ọ Ệ

VI N ĐÀO T O QUỐỐC TẾỐ Ệ Ạ Institute of International Finance Education

DUAL DEGREE PROGRAMME- DDP

GROUP -WORK -MA1

Group 7

Group members: 1, Hồ Tự Hồng – DDP0603123

2, Vương Thành Công – DDP0603125

3, Khúc Thành Lộc - DDP0603112

4, Vũ Minh Tường – DDP0601045

Academic Year (Semester): 2023-2024 (Semester 1)

Class Code: MA1.0604

Mentor: ThS Ngô Như Vinh

Ann Arbor Railroad Company case

Ann Arbor Railroad (AAR) is a railroad company that is partly financed by the US Department of Transportation through its high-speed rail stimulus initiative AAR operates a daily train service between Detroit, MI, and Chicago, IL The Company operates two classes of passenger trains: slow-speed and high-speed AAR built and currently maintains a roadbed and tracks between the two cities as well as stations in both Detroit, MI, and Chicago, IL The tracks and signaling equipment cost approximately $1 million per mile to build and will be depreciated over thirty years

The bulk of the Company’s station-related costs arise from the Detroit and Chicago stations Costs for the intermediate stations, which are only used by the slow-speed trains, are largely paid for by the local municipalities

AAR does not own any trains but leases them Specifically, it leases 10 high-speed trains (locomotives plus carriages) from Siemens AG and 10 slow-speed trains (locomotives plus carriages) from GE Locomotives refer to the motorized entity pulling the carriages Carriages carry passengers but are unable to move autonomously The Company is responsible for maintaining the trains The high-speed trains are technologically advanced and more costly than the slow-speed trains, which are technologically simpler and older AAR employs the train engineers and the onboard service staff

The Company has contracted with Gourmet Services Inc to provide complimentary food and drinks to high-speed passengers The contract entails a fixed monthly payment of

$700,000 plus $8 per passenger Slow-speed train passengers receive no complimentary items; they can buy food and beverages from an independent catering company with no profit or loss for AAR

Projected cost and travel volume data appear in Tables 1 and 2 Please refer to these to answer the following questions The data are only approximate and have been modified

to ease computations

Table 1: Ann Arbor Railroad — Projected cost for March 20X0

Head office-related (in

Detroit station)

Administrative personnel, marketing costs, IT costs $500,000 per month

Roadbed, track, and

signaling

equipment-related

Depreciation of track &

signaling equipment $1,000,000 per month Interest payments $500,000 per month Maintenance workers $5,000 per month

Repair materials $200 per slow-speed trip

$400 per high-speed trip

Station-related

Building costs (temperature control, leasing costs, etc.) and other costs (including cleaning service, ticket, and baggage handling personnel)

Detroit: $20,000 per month Chicago: $32,000 per month

All other stations combined:

$7,000 per month

Train-related

Leasing costs – slow-speed train $100,000 per month per train Leasing costs – high-speed

train $500,000 per month per train Hauling costs (power and fuel) $5,000 per slow-speed trip

$8,000 per high-speed trip Engineers and onboard service

staff total $150,000 per month Onboard services Gourmet Services Inc contract $700,000 per month

$8 per passenger

Table 2: Ann Arbor Railroad — Projected business for March 20X0.

VOLUME Slow-Speed High-Speed

Note: Passenger volumes and fares are averaged across trips Trips and Average Ticket Price both refer to round trips

2 Case requirements

Part 1 Cost and revenue information

Question 1 What is the total projected cost for March 20X0?

Variable costs ( $)

Repair Material Cost (400*300)

Leasing Cost (500,000*10)

=5,000,000

(100,000*10)

Hauling Cost (8,000*300)

=2,400,000

(5,000*200)

Onboard Services-Fixed 700,000 700,000

Fixed Cost ($)

Depreciation of track &

signaling equipment

500,000 500,000 1,000,000

(Equally as 10 trains each)

Interest payment 250,000 250,000 500,000

(Equally as 10 trains

each )

Maintenance Workers Cost 3,000 2,000 5,000

( on no of Tríp 300:200 )

Engineer & On board Staff

Cost

90,000 60,000 150,000

( on no of Trip 300 : 200 )

=8.43 =10.83 Other Fixed Costs ($)

Head Office Related Cost 500,000

Building Cost- Detroit 20,000

Building Cost-Chicago 32,000

Buliding Cost-Other

stations

7,000

559,000

Other Fixed Cost per

passenger ($)

3.19 3.19

Total Fixed Cost per

passenger ($)

Total Projected Cost for

Month 20X0

13,274,000

Question 2 What is the projected profitability per passenger (revenues minus costs) for the

high-speed and slow-speed services for March 20X0?

Anna Arbor Railroad Statement of Profitability per passenger

Revenue form Tickets (180*100,000)

=18,000,000

(50*75,000)

=3,750,000

21,750,000

Less : Variable cost (9,020,000) (2,040,000) 11,060,000 Total Contribution 8,980,000 1,710,000 10,690,000

Less: Fixed cost per passenger ( From

Q1)

11.62 14.02

Part 2 Management decisions

Question 3 Assume that you are the manager in charge of the high-speed service On March

a round trip from Detroit to Chicago on March 21st to conduct a market research study for their final project Specifically, the MBA students have arranged for undergraduates to participate in the study, which is aimed at identifying factors that make train travel more attractive to customers The MBA students are on a limited budget and propose to pay Ann Arbor Railroad

$1,000 for the round trip for the 20 seats Tickets sales for March 21st have been low, and, as of today, there are still over 100 seats available Would you accept the students’ offer?

Reservations : 20

Price per seat : $ 1,000

Total revenue from the offer :

20 seats x $ 1,000 = $ 20,000

Consider costs :

High-speed haul: $ 8,000

Round-trip transportion costs: 2 x $ 8,000 = $ 16,000

Profit/Loss : Sales : $ 20,000 - $ 16,000 for transportion

Profit: $ 4,000 ($ 20,000-$16,000)

Cost of sale = ( $843,000 - $20,000 )/ $100,000 ( total passengers of high speed) = $82,3

Profit per passenger = $97,7

- As per the Fact of Question, An MBA student offer 20 round trip revenue and our calculation shows that it will reduce the fixed cost burden because on 21st March passenger is rate is very low In my opinion, now accept the offer based on the above calculations

Explaintion :

Accept the pupil’s offer would net $ 4,000

Accord to calculations However, ticket sales, seat availability, and consumer effect should be considered Accept the offer could boost revenue and market research if the seats can be sold at higher prices, may be better to wait to accept the offer Business strategy and long-term

Question 4 Using the information from Table 2, what is the number of tickets that Ann Arbor

Railroad must sell to break even in each service line? What is the volume of sales that Ann Arbor Railroad must generate to break even overall?

For Break-even, we are only considering fixed costs which have been allocated to the service lines We are ignoring other fixed costs

Break even point for each service line:

- High-speed service:

Fixed cost = $843,000

Contribution per passenger = $89,8 - $8 (Gourmet service) = $81,8

Break even point = $843,000 / $81.80 = 10,305 tickets

- Slow-speed service:

Fixed cost = $812,000

Contribution per passenger = $22,8

Break even point = $812,000/ $22.80 = 35,614 tickets

Assuming the sale of mix remains unchanged:

Total fixed cost: $2,214,000

Weighted average contribution per passenger: $61,9

Overall: Break even point = $2,214,000 / $61.09 = 36,242 tickets

Question 5 Should Ann Arbor Railroad offer discounted tickets for the high-speed service on a regular basis if there are still seats available right before a train departs?

- Anna Arbor Railroad should consider offering discounted tickets for the high-speed service on the same terms offered to MBA students on a regular basis if there are still seats available right before a train departs This strategy can help increase revenue and improve the utilization of the high-speed trains

- By offering discounted tickets, Ann Arbor Railroad can attract more customers who my not have considered taking the high-speed train due to the high price This can also help more customers in the future Additionally, by filling up seats that would otherwise remain empty, the company can maximize its revenue and improve the utilization of its resources

- However, Anna Arbor Railroad should be cautions about how it implements this strategy Offering discounted tickets on a regular basis may lead to customers waiting until the last minute to purchase tickets, which can disrupt the company’s planning and create uncertainly To mitigate this risk, the company should limit the availability of discounted tickets to a certain percentage of total seats, and make sure that the prices are high enough

Question 6 Among the two cost configurations computed in question 2 and question 3, which

one would you use as a reference to set the long-term price for the high-speed service?

Then compare two cost configurations, we can chosing the way of Question 3 for the long-term price for the high-speed service because it brings to the higher profit per passenger and helping the company can control the cost

Question 7 Under the High-Speed Intercity Passenger Rail (HSIR) program (sponsored by the

US Department of Transportation), Ann Arbor Railroad has received a $5 million grant for capital investments The money will be used to upgrade the signaling system along the tracks and to install more efficient and safer switches As a result, travel time and hauling costs for the high-speed service will be reduced More specifically, the average hauling cost per trip for the high-speed service will be reduced to $6,500, while the average travel time will be 15 min shorter Would you update the price per ticket, for the high-speed service, to reflect the reduction in the hauling costs?

When the average hauling cost per trip for the high-speed service will be reduced to

$6,500 will change in total projected cost

Variable costs ( $)

Repair Material Cost (400*300)

=120,000

(200*200)

=40,000

160,000

Leasing Cost (500,000*10)

=5,000,000

(100,000*10)

=1,000,000

6,000,000

In question 3 Revenue 180

Profit per

In question 2 Profit per passenger 78,18

Hauling Cost (6,500*300)

=1,950,000

(5,000*200)

=1,000,000

2,950,000

Onboard Services-Fixed 700,000 700,000

Fixed Cost ($)

Depreciation of track &

signaling equipment

500,000 500,000 1,000,000

(Equally as 10 trains each)

Interest payment 250,000 250,000 500,000

(Equally as 10 trains each )

Maintenance Workers Cost 3,000 2,000 5,000

( on no of Tríp 300:200 )

Engineer & On board Staff

Cost

90,000 60,000 150,000

( on no of Trip 300 : 200 )

Fixed Cost per passenger ( $ ) 843,000/100,00

0

=8.43

812,000/75,00 0

=10.83 Other Fixed Costs ($)

Head Office Related Cost 500,000

Building Cost- Detroit 20,000

Building Cost-Chicago 32,000

Buliding Cost-Other stations 7,000

559,000

Other Fixed Cost per

passenger ($)

3.19 3.19

Total Fixed Cost per

passenger ($)

Total Projected Cost for

the projected profitability per passenger (revenues minus costs) for the high-speed and slow-speed services for March 20X0 when changed the hauling cost ( hight speed service will be reduced to $6,500 )

Anna Arbor Railroad Statement of Profitability per passenger

Revenue form Tickets ($180*100,000)

=18,000,000 ($50*75,000)=3,750,000 21,750,000

Less : Variable cost (8,570,000) (2,040,000) 10,610,000

Less: Fixed cost per passenger ( From

Q1)

11.62 14.02

The number of tickets sold to customers will change

Break even point for each service line:

- High-speed service after changed:

Fixed cost = $843,000

Contribution per passenger = $94,3 - $8 (Gourmet service) = $86,3

Break even point = $843,000 / $94,3 = 9,768 tickets

- High-speed service:

Fixed cost = $843,000

Contribution per passenger = $89,8 - $8 (Gourmet service) = $81,8

Break even point = $843,000 / $81.80 = 10,305 tickets

The break even point will decrease: 10,305-9,768 = 537 tickets

Reducing the break-even point can help businesses achieve profits faster.

Would you update the price per ticket, for the high-speed service, to reflect the reduction in the hauling costs?

- Yes, updating the price per ticket for the high-speed service to reflect the reduction in hauling costs is a common approach in many transportation and business models

- When there's a reduction in hauling costs due to improvements in infrastructure or operational efficiencies, businesses often consider adjusting their pricing to reflect these changes Lower costs may allow for increased profitability, improved competitiveness, or enhanced value proposition for customers

Part 3 Design of management accounting systems

Question 8 Question 2 asked about the projected profitability per passenger Why do we need

projected cost and revenue figures? Why do we not wait until the end of the month/year to compute actual costs and revenues?

A, Why do we need projected cost and revenue figures?

1 Planning and Decision Making: Forecasts offer a glimpse into the future and aid in

planning They provide a basis for making strategic decisions, setting goals, allocating resources, and managing risks Companies use forecasts to anticipate market trends, consumer demands, and operational needs For instance, a retail company might forecast demand for certain products to ensure sufficient inventory is available during peak seasons

2 Proactive Strategy: Forecasts enable companies to adopt a proactive approach rather

than a reactive one By foreseeing potential challenges or opportunities, they can prepare adequately For example, an energy company might use weather forecasts to anticipate demand, enabling them to adjust their energy production accordingly

3 Risk Management: Forecasts help in risk assessment and mitigation Companies can

anticipate financial risks, market fluctuations, and other potential challenges, allowing them to make informed decisions Insurance companies, for instance, heavily rely on forecasts to calculate potential risks and set premiums accordingly

4 Resource Allocation: Using forecasts assists in better resource allocation Companies

can efficiently allocate funds, manpower, and time based on expected needs and demands For instance, a construction company might forecast material costs and labor availability for upcoming projects, allowing them to manage resources more effectively