In order to complete your case analysis successfully, you must
An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content.
Case: Cost Structures for Global Shippers Inc.
Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision:
Cost Information |
Option A |
Option B |
---|---|---|
Delivery price (revenue) per shipment |
$100 |
$100 |
Variable cost per shipment delivered |
$85 |
$60 |
Contribution Margin per unit |
$15 |
$40 |
Fixed costs (annual) |
$1,200,000 |
$4,500,000 |
Management wants you to write a professional report, answering the
following questions:
Questions
1) What is the break-even point, in terms of volume (i.e., number of shipments per year), for Option A? Option B?
(2) How many shipments would have to be made under Option A to produce operating income of $30,000 for an annual period?
(3) How many shipments per year would have to be made under Option A to produce an operating margin equal to 9% of sales revenue?
(4) How many shipments are required under Option B to produce net income of $180,000 per year, given a corporate tax rate of 40%?
(5) Assume that for the coming year total fixed costs are expected to increase by 15% for each of the two options. What is the new break-even point, in terms of number of shipments, for each option? By what percentage did the break-even point change for each case? How do these figures compare to the percentage increase in budgeted fixed costs?
(6) Assume an average income-tax rate of 20%. What volume (number of shipments) would be needed to generate net income of 5% of revenue for each option?
(7) Which option do you think is the more profitable one for this business? Explain.
(8) Which option do you consider to be more risky to the business? Explain (calculate degree of operating leverage to help answer this question).
Solution
Global Shippers Inc
Option A –
Break-even point, in terms of volume = fixed cost/unit contribution margin
Fixed cost = $1,200,000
Contribution margin per unit = $15
Break-even points in terms of volume = 1,200,000/15 = 80,000 shipments
Option B –
Break-even point, in terms of volume = fixed cost/unit contribution margin
Fixed cost = $4,500,000
Contribution margin per unit = $40
Break-even points in terms of volume = 4,500,000/40 = 112,500 shipments
Option A – to produce operating income of $30,000 for an annual period:
Desired number of shipments = (target income + fixed cost)/unit contribution margin
Target income = $30,000
Fixed cost = $1,200,000
Unit contribution margin = $15
Desired number of shipments = (30,000 + 1,200,000)/15 = 82,000 shipments
Option A – to produce operating margin equal to 9% of sales revenue.
Desired number of shipments = (target income + fixed cost)/unit contribution margin
Assuming the desired number of shipments to be A,
Target income = 9% x $100 x A = 9A
Fixed cost = $1,200,000
Unit contribution margin = $15
Desired number of shipments = (9A + 1,200,000)/15 = A shipments
15A = 9A + 1,200,000
6A = 1,200,000
A = 1,200,000/6 = 200,000 units
Target income = 9% x $100 x 200,000 = $1,800,000
Net income =180,000
Tax rate = 40%
Before tax income = 180,000/60% = $300,000
Fixed cost = $4,500,000
Contribution margin per unit = $40
Number of shipments = (300,000 +4,500,000)/40 = 120,000 shipments
Hence, shipments needed to produce net income of $180,000 per year under option B = 120,000.
Option A –
Fixed cost = $1,200,000
Add increase = 15% x 1,200,000 = 180,000
New fixed cost = 1,380,000
Contribution margin per unit = $15
Break-even point, in terms of number of shipments = 1,380,000/15 = 92,000 shipments
Change in break-even point –
Original break-even point 80,000 shipments
New break-even point in terms of volume = 92,000
Increase = 92,000 – 80,000 = 12,000 shipments
Percent increase in break-even point, volume = 12,000/80,000 = 15%
Option B –
Fixed cost = $4,500,000
Add increase = 15% x 4,500,000 = 675,000
New fixed cost = 5,175,000
Contribution margin per unit = $40
Break-even point, in terms of number of shipments = 5,175,000/40 = 129,375 shipments
Original beak-even point in volume = 112,500 shipments
New break-even point , volume = 129,375 shipments
Increase = 129,375 – 112,500 = 16,875 shipments
Percent increase = 16,875/112,500 = 15%
The increase in break-even point, in terms of shipment for both the options is 15%, which is equal to the percent increase in fixed cost for both the options. This indicates that the break-even point, in terms of value increases in proportionately with the fixed cost.
Option A -
Net income = 5% x $100 x A = $5A
Tax rate = 20%
Before tax income = 5A/80% = $6.25A
Fixed cost = $1,200,000
Contribution margin per unit = $15
Number of shipments = (6.25A +1,200,000)/15 = A
15A = 6.25A +1,200,000
8.75 A = 1,200,000
A = 1,200,000/8.75 = 137,143 shipments
Option B –
Net income = 5% x $100 x A = $5A
Tax rate = 20%
Before tax income = 5A/80% = $6.25A
Fixed cost = $4,500,000
Contribution margin per unit = $40
Number of shipments = (6.25A +4,500,000)/40 = A
40A = 6.25A +4,500,000
33.75 A = 4,500,000
A = 4,500,000/33.75 = 133,333 shipments
Hence, shipments needed to produce net income of 5% of sales revenue per year under option B = 133,333.
Option A is the most profitable option for this business. The break-even point, in terms of volume for option A (80,000) is less compared to the break-even point, in terms of volume for option B (112,500). The lesser the break-even point, the quicker the company would start making profits.
The option B is probably the more risky option, in view of higher proportion of fixed costs.
In order to complete your case analysis successfully, you must identify the role you are playing,...
Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision: Cost InformationOption AOption BDelivery price...
Case: Cost Structures for Global Shippers Inc. Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in...
Case: Cost Structures for Global Shippers Inc. Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information...
et can contain viruses. Unless you need to edit, it's safer to stay in Protected View Enable Editing Case: Cost Structures for Global Shippers Inc. Management from Global Shippers Inc, an interational shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite relatively lower variable costs in its cost structure but...
Case: Cost Structures for Global Shippers Inc. Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in...
In three units of study, there will be application-focused cases due at the beginning of the class that will be provided by the instructor. These cases will be complex in nature and will require the application of course concepts to real-word business situations. Each case will have an associated rubric to highlight expectations. All submissions must be of professional quality and done in Microsoft Word, Microsoft Excel, or submitted as a PDF. Objectives • To apply cost-volume profit analysis to...
Instructions and Submission Galaxy Incorporated • Due no later than the start of class in Unit 5 or as directed by your professor • Worth 5% of final grade Late Submission Policy • This assignment is subject to the Late Submission penalty policy, namely 5% per day for three days. • This page will close and will not allow further submissions after this Late Submission period has expired. • In the event of an emergency preventing you from submitting within...
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Instructions In order to complete your case analysis successfully, you must identify the role you are playing, assess user needs analyze user needs or issues (qualitatively and quantitatively), and provide a recommendation and conclusion. An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content. Case: Cost System Considerations for CANADA SNOWCONES LTD. Canada...