Question

Amtrack has an opportunity to obtain a new route that would be traveled 20 times per month with 3 cars . Amtrack believe it can sell for $125 on the route ,but the load factor would be only 70percent .this route would incur fixed costs of $200000 per month for the additional crew , additional passenger trains cars , maintenance and so on.variable cost per passenger would remain $40.

Should Amtrak purchase this route?

Answer 1

Amtrak should purchase this new route as the potential revenue exceeds the total costs.

Step-by-step explanation:

To determine whether Amtrak should purchase this new route, we need to calculate the potential revenue and costs. The route would be traveled 20 times per month with 3 cars, so the total number of passengers would be 20 * 3 = 60 passengers per month.

Given the load factor of 70%, the actual number of passengers would be 60 * 0.70 = 42 passengers per month.

With a selling price of $125 per passenger, the potential revenue would be 42 * $125 = $5,250 per month.

The fixed costs for the additional crew, passenger train cars, and maintenance would be $200,000 per month. The variable cost per passenger is $40. Therefore, the total variable cost per month would be 42 * $40 = $1,680.

To determine whether Amtrak should purchase the route, we need to compare the potential revenue with the total costs. The total costs would be the fixed costs of $200,000 plus the variable costs of $1,680, which is $201,680 per month. Since the potential revenue of $5,250 per month is greater than the total costs, it would be profitable for Amtrak to purchase this route.