Question

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.
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• In the event of an emergency preventing you from submitting within this time frame, special permission must be obtained from your instructor. Documentation substantiating emergency is required. In such a circumstance, if the extension is granted, the professor will reopen the submission function for you on an individual basis.
• Please do not email your submissions to your professor, either before or after the due date; all coursework should be submitted through the online course (Moodle).


Description
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 a business decision
• To calculate operating income and perform sensitivity analysis on operating income given changes in variables.
• To illustrate the importance of hidden (undirected) issues that arise from a detailed analysis.
• To prepare a coherent report and integrated analysis that meets specific user needs.
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 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) $1,450,000 $4,700,000

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 $43,000 for an annual period?
(3) How many shipments per month would have to be made under Option A to produce an annual operating margin equal to 11% of sales revenue?
(4) How many shipments are required under Option B to produce net income of $213,000 per year, given a corporate tax rate of 25%?
(5) Assume that for the coming year total fixed costs are expected to decrease by 8% 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 35%. What volume (number of shipments) would be needed to generate net income of 8% 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).

Answer 1

As per policy, only four parts of a question is allowed to answer at a time, so answering first four parts here:

Req 1) Break even point:
Option	A	B
Revenue per shipment	100	100
Variable cost	85	60
Contribution per shipment	15	40
Fixed Costs	1450000	4700000
BEP (in shipments per year)	96667	117500
Req 2)	Option A
Fixed cost	1450000
Operating income required	43000
Total Contribution required, A	1493000
Contribution per shipment, B	15
Shipments required, A/B	99533
Req 3)	Option A
11% operating margin of Revenue	11
Variable cost per shipment	85
Total variable cost & profit	96
Revenue per shipment	100
Fixed cost per shipment required	4
Monthly Fixed Cost (AFC/12)	120833
Shipments per month required	30208
Req 4)	Option B
Net Income (net of tax 25%)	213000
Operating income (NI/75%)	284000
Fixed cost per year	4700000
Contribution required, C	4984000
Contribution per shipment, D	40
Annual Shipments required, C/D	124600