IV.

A bus service for draper

Draper, where Tech is located, does not have a commercial airport; instead, residents who are flying on
an airline must travel to the airport in Roanoke 40 miles away. The town council is considering a joint
economic development plan with the local Chamber of Commerce and the university to start a bus
service from the town to the airport in Roanoke with other stops on the way and back, that will operate
365 days per year. In order to have continuous daily service for the 1.5-hour round trip, 3 passenger
buses, each with a seating capacity of 55 passengers, will need to be purchased at a cost of $400,000
apiece. Each bus will make 4 trips spread out during the day starting at 5 a.m. in order to deliver
passengers to the airport in time for the first flight of the day, and they will pick up passengers up at the
airport after the last scheduled flight of the day lands. Passengers who are going to work or school will
also embark and disembark at various stops along the route. The operating cost per hour (including fuel
and driver salary) for each bus is estimated to be $90 per hour per trip. The planned fare per rider is $4,
regardless of where they get on or off the bus. Based on customer surveys, it is estimated that an
average of 37 passengers will ride the buses each trip in the first year.

A. The town anticipates that the service will lose money the first year; how much will it lose?

B. How many years will it take the service to break-even, if at all, during the 6-year life span of the buses?

C. What would be the effect if the bus service ridership averages 45 passengers per trip? 50 passengers
per trip?

D. If the trips per day per bus were reduced to 3 with a corresponding increase in passengers to 50 (due
to increased demand for the fewer trips), what effect would this have?

E. Because the bus service project has a “green” footprint by taking cars off of the road, and will also
spur economic development by providing low-cost regular transportation from

Draper to Roanoke, and from Roanoke to the university, the town believes it can get a federal grant to
pay for the purchase of the buses. How would this effect the financial loss in the first year of operation,
and the years it might take to break even?