Calculate contribution per mile and total annual

Assignment Help Managerial Accounting

Reference no: EM132475923

"Over-land Trucking and Freight: Relevant Costs for Decision Making"

Question (1) Assume Over-land could service the contract with existing equipment. Use Exhibit 1 to identify the relevant costs concerning the acceptance of FHP's request to add two additional loads per week. Which costs are not relevant? Why?

Question (2) Calculate the contribution per mile and total annual contribution associated with accepting FHP's proposal. What do you recommend? (Use 52 weeks per year in your calculations)

Question (3) Consider the strategic implications (including risks) associated with expanding (or choosing not to expand) operations to meet the demands of FHP. Analyze this question from a conceptual point of view. Calculations are not necessary.

Question (4) After a closer examination of capacity, management believes an additional rig is required to service the FHP account. Assume Over-land's management chooses to invest in one additional truck and trailer that can serve the needs of FHP (at least initially). Assume the annual incremental fixed costs associated with acquiring the additional equipment is $50,000. Further, FHP would agree to pay $2.20 per mile (total including FSC and miscellaneous) if Over-land would sign a five-year contract. What is the annual number of miles required for Over-land to break even, assuming the company adds one truck and trailer?What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.)

Question (5) Over-land has business relationships with independent contractors, though Alan is reluctant to use them. Another possibility for expanding capacity is to outsource the miles requested by FHP. One of Overland's most reliable independent contractors has quoted a rate of $1.65 per mile. As with question 4, assume FHP would agree to pay $2.20 per mile if Over-land would sign a five-year contract. Further, assume Over-land would incur incremental fixed costs of $20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and office salaries such as billing. How many annual miles are required for Over-land to break even if the miles are outsourced? What is the expected annual increase in profitability from the FHP contract? What are your conclusions?

Question (6) a. Why might Over-land use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver?

Question b. At what point would management be indifferent between the scenarios illustrated in questions 4 and 5? Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why?

Reference no: EM132475923

Questions Cloud

Issues between work and family institutions : Issues between work and family institutions found in preindustrial society more often than today.

Determine how is refund between savings and checking account : The Matthews want to split their refund between savings and checking accounts. Determine How is this accomplished, if possible?

Determine effect of transaction on the accounting equation : Sampson Corporation pays dividends of $9,000 to shareholders. Which of the statements correctly shows the effect of this transaction on the accounting equation.

What is a bureaucracy : What is a bureaucracy? What is the identify of the 5 functions of the bureaucracy?

Calculate contribution per mile and total annual : Why might Over-land use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver?

Compute indirect cost allocation rate per check processed : Assuming that there are only indirect costs and no direct costs, compute the average profit per account for retail customers and for business customers.

What are the subcategories of primary and secondary groups : What are the subcategories of primary and secondary groups, i.e., what is an in-group, what is an out-group? What is a reference group? Give examples.

What was the value of net income for fiscal year : Where specifically in this annual report can you learn more information about Exxon Mobile's ''Property, Plant, and Equipment?'

Calculate missing information use knowledge of accounting : Calculate missing information using knowledge of the accounting equation, II: Below is some selected information from the financial statements

User Account

All Pages