Reference no: EM133102408

Question - 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.)

Contract Revenue (per mile) 2.20

Variable Expenses (per mile) 1.39

Contribution Margin (per mile) 0.81

Breakeven mileage

Incremental Fixed Costs 50,000

Contribution Margin (per mile) 0.81

Breakeven Mileage (annual) 61,728

Expected Annual Mileage 156,000

Contribution Margin 126,360

Incremental Fixed Costs -50,000

Net Annual Benefit 76,36

Required - What is the expected annual increase in profitability from the FHP contract?