Question

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.

Answer 1

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.