Question

The New York City Subway has 40,000 passengers every day. However, they are fairly price sensitive. Is the current price of $2 were to increase to $2.50, it is likely that there would be only 30,000 passengers each day. On the other hand, if the prices were to drop to $1.50, the ridership would increase to 50,000. The variable costs are only 8 cents per passenger. The fixed costs of operating the subway are $70,000 per day. How many passengers are needed each day to break even at the current $2 price?

Prepare a flexible budget for the subway system at prices of $1.50, $2.00, and $2.50. (Refer to Chapter 3 for a discussion of flexible budgets.) Considering only the financial implications, what should be done? Why? How can you reconcile the results of the flexible budget with the results of the break-even calculation?

Answer 1