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Variable Costing Income Statement for a Service Company East Coast Railroad Company transports commodities among three...

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.

Solutions

Expert Solution

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


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