In: Accounting
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 railroad’s profitability is sensitive to the size, or length, of the train in railcar terms.
a.
East Coast Railroad Company | ||||
Contribution Margin by Route | ||||
For the Month Ended April 30 | ||||
Atlanta / Baltimore | Baltimore / Pittsburgh | Pittsburgh / Atlanta | Total | |
Revenues (A) | 255,000 | 594,000 | 542,080 | 1,391,080 |
Variable Costs: | ||||
Labor Cost for loading and unloading railcars | 19,550 | 99,360 | 56,672 | 175,582 |
Fuel Cost | 159,154 | 126,480 | 174,592 | 460,226 |
Train Crew Labor Cost | 92,412 | 73,440 | 101,376 | 267,228 |
Switchyard Labor Cost | 13,175 | 66,960 | 38,192 | 118,327 |
Total Variable Cost (B) | 284,291 | 366,240 | 370,832 | 1,021,363 |
Contribution Margin (C ) = (A) - (B) | (29,291) | 227,760 | 171,248 | 369,717 |
Contribution Margin Ratio = (C ) / (A) | -11.49% | 38.34% | 31.59% | 26.58% |
b.
The Route Atlanta to Baltimore performs significantly worse than
the other two routes. A close examination of the operating
statistics indicates that the route Baltimore / Pittsburgh runs
railcars, combined with fairly total mileage (Since a railcar
covers as low as 10,200 / 2,160 = 4.72 kms). This combination
suggests that the railroad is running many trains on the rail road.
That is, the railroad's profitability is sensitive to length of the
train in railcar terms