6.7 Exercises

  1. MCPTA Break-Even Analysis (***): The Metro City Public Transportation Authority (MCPTA) is considering expanding its fleet from currently 150 to 200 buses to accommodate growing demand. Each bus has a capacity of 60 passengers. The average operating cost per bus is $450 per day and includes fuel, maintenance, depreciation, and the driver’s salary. MCPTA charges a flat fare of $1.50 per ride. Each bus does 10 round trips per day on its route and operates 365 days a year. The buses currently operate at 70% capacity on average. Overhead is currently $4 million. MCPTA expects that the new expansion would decrease ridership because of the transport network becoming larger. In addition, fixed costs (e.g., infrastructure, administrative overhead) would rise by an additional $500,000 annually with this expansion.

    1. Calculate and report MCPTA’s profit without the expansion. Assuming the load capacity dropping to 65% after the expansion, what is the new profit with 200 buses?
    2. Calculate the break-even capacity in percent that MCPTA needs in order to cover the new total operating costs with the expanded fleet. Show all steps in your calculations, including the new total costs, revenues, and break-even analysis.
    3. If MCPTA considers raising the fare to $1.75 per ride, how would this affect the break-even number of daily passengers? Would this new fare reduce the financial risk of the expansion? Explain.
    4. Discuss other public finance factors that could impact MCPTA’s decision to expand (e.g., subsidies, long-term infrastructure costs, elasticity of demand, social welfare, or environmental benefits). What are your recommendations?

  2. Municipal Electric Utility Expansion (***): The City of Hoosier Valley operates its own municipal electric utility (HV Electric) and provides electricity to 100,000 households. The current generation capacity is 500 gigawatt-hours (GWh) per year, and the utility operates at 85% of its capacity. The utility charges $0.13 per kilowatt-hour (kWh), and the total annual cost (including fixed and variable costs) is $40 million. The fixed costs, which include infrastructure maintenance, administrative overhead, and long-term debt servicing, account for 60% of the total annual cost. Due to population growth and increasing energy consumption, the city anticipates a 20% increase in demand for electricity over the next 5 years given current electricity prices. HV Electric is considering expanding its capacity to 600 GWh by investing in renewable energy sources (solar and wind). The expansion would increase the annual fixed cost 10 million in one-time capital costs, spread equally over the next 5 years, plus an ongoing annual increase of $2 million in variable operating costs (labor and maintenance). The city is also considering raising the electricity rate to $0.15 per kWh to finance the expansion and offset rising costs. The proposed rate increase is expected to reduce overall electricity usage such that the utility load decreases by 3 percentage points to 82%.

    1. Assuming no expansion, calculate and report the current cost per kWh for delivered electricity and the current annual profit of HV Electric.
    2. Given the expansion and the proposed rate increase, calculate and report the new cost per kWh for delivered electricity and the new annual profit of HV Electric.
    3. Calculate the break-even point for HV Electric’s the expansion capacity scenario in terms of load capcity. That is, the 3 percentage point drop may be an underestimation and the board of directors of HV Electric would like to know the maximum load capcaity drop that allows them to remain profitable.
    4. Opponents to the rate increase claim that even without any rate increase (and thus, without drop in demand), HV Electric is profitable. Is this claim correct? Support your answer with the relevant calculations.