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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 $186,930 Variable $46.50 per railcar
Fuel costs 399,040 Variable 11.60 per train-mile
Train crew labor costs 233,920 Variable 6.80 per train-mile
Switchyard labor costs 123,414 Variable 30.70 per railcar
Track and equipment depreciation 198,100 Fixed
Maintenance 132,100 Fixed

Operating statistics from the management information system reveal the following for April:

Atlanta/
Baltimore
Baltimore/
Pittsburgh
Pittsburgh/
Atlanta
Total
Number of train-miles 12,080 9,520 12,800 34,400
Number of railcars 630 2,120 1,270 4,020
Revenue per railcar $517 $248 $401

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.

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 % % % %

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

East Coast Railroad Company

Contribution Margin by Route

For the Month Ended April 30

Atlanta/Baltimore

Baltimore/Pittsburgh

Pittsburgh/Atlanta

Total

Revenues

$      325,710.00

$           525,760.00

$       509,270.00

$1,360,740.00

Variable costs:

Labor costs for loading and unloading railcars

$        29,295.00

$            98,580.00

$         59,055.00

$   186,930.00

Fuel costs

$      140,128.00

$           110,432.00

$       148,480.00

$   399,040.00

Train crew labor costs

$        82,144.00

$            64,736.00

$         87,040.00

$   233,920.00

Switchyard labor costs

$        19,341.00

$            65,084.00

$         38,989.00

$   123,414.00

Total variable costs

$     270,908.00

$           338,832.00

$       333,564.00

$   943,304.00

Contribution margin

$        54,802.00

$           186,928.00

$       175,706.00

$   417,436.00

Contribution margin ratio

16.8%

35.6%

34.5%

30.7%

B)    Atlanta/Baltimore has the lowest Contribution margin due to Fuel cost in comparison to other routes. Although Loading and Unloading labor cost is low in Atlanta/Baltimore Route in comparison to other routes.


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