Reference no: EM132500373

Question 1 : 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 Over- land's most reliable independent contractors has quoted a rate of $1.65 per mile. 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?

Contract Revenue (per mile)                                          2.20

Variable Expenses                                                        1.65

Contribution Margin (per mile)                                        0.55

Break Even Mileage:

Incremental Fixed Costs                                             20,000

Contribution Margin (per mile)                                        0.55

Annual Break Even Mileage                                        36,364

Expected Annual Mileage                                          156,000

Additional Revenue                                                   343,200

Additional Variable Cost`                                         (257,400)

Incremental Fixed Cost                                               (20,000)

New Annual Benefit ( after accepting proposal)                  65,800