Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 44

Cost Planning; Service Company Triangle Business Service Inc (TBS) is a delivery service specializing in small parcels, envelopes, and packages. TBS guarantees delivery of within 90 minutes for any business or residence in the Triangle (Greensboro-High Point-Winston-Salem) area. The owner of the business is currently evaluating the choice between two different cost structures for a planned increase in the business operations. One option is to buy 200 vehicles and hire delivery personnel to deliver the packages. Option two is to hire delivery personnel who would use their own vehicles for deliveries; the delivery personnel in this case would be compensated for their time and also for the use of their vehicles. For corporate purposes, the delivery personnel under option two would be required to attach a magnetic decal to their car or truck to identify it as a provider for TBS. Option one is the high fixed cost, high leverage option, and option two has the lower fixed cost but significantly higher variable costs. For simplicity, we assume that each package is delivered for the same price of $60.

Item	Drivers’ Cars	TBS’s Cars
Delivery price per package	$ 60	$ 60
Variable cost per package delivered	48	30
Contribution margin per unit	12	30
Fixed costs (per year)	$600,000	$3,000,000

Required

1. What is the breakeven point, in terms of number of deliveries per year, for the each alternative?

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2. How many deliveries would have to be made under each alternative to generate a pretax profit of $25,000 per year?

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3. How many deliveries would have to be made under option two (drivers use their cars) to generate a pretax profit equal to 15 percent of sales revenue?

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4. Assume an effective income-tax rate of 40 percent. What number of deliveries would be needed to generate an after-tax profit of $36,000 for the TBS-Cars alternative?

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5. Which decision alternative is the more profitable for TBS? Which alternative is more risky, and why?

Step 1 of 10

Breakeven Point in Units

The breakeven point also known as the breakeven level is can be defined as that level of operations where the company’s revenue is just enough to meet its costs. It is the point at which the company makes no profit no loss and just meet its costs. The breakeven point has a profit equal to zero and revenues exactly equal to the total of variable and fixed costs incurred by the company.