Question

Travon's Limo Service provides transportation services in and around Bentonville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $275,000 per year. The total cost to lease additional delivery vehicles from the local dealer is $60,000 per year. The present manager will continue to supervise all services. However, labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the package delivery service is added. $ 960,000 Travon's Limo Service Annual Income Statement Before Expansion Sales Revenue Costs: Vehicle leases $400,000 Labor 290,000 Utilities 50,000 Rent 100,000 Other Costs 60,000 Manager's Salary 120,000 Total Costs Operating Profit (Loss) 1,020,000 $ (60,000) a. Prepare a report of the differential costs and reveques if the delivery service is added. b. Should management start up the delivery service? Explain your answer.

Answer 1

Before expansion After expansion Differential Amt Sales Revenue $ 960,000 $ 1,235,000 $ 275,000 $ $ Costs :- Vehicle leases Labor Utilities Rent Other cost Managers salary $ $ $ $ $ $ $ 400,000 $ 290,000 $ 50,000 $ 100,000 $ 60,000 $ 120,000 $ 1,020,000 $ 460,000 $ 406,000 $ 70,000 $ 115,000 $ 69,000 $ 120,000 $ 1,240,000 $ 60,000 116,000 20,000 15,000 9,000 Increased by 40% Increased by 40% Increased by 15% Increased by 15% 220,000 Operating profit (loss) $ (60,000) $ (5,000) $ 55,000

The managment may startup the delivery service as there is a massive reduction in loss $55,000.

The company may implement alternative two because eventhough the anticipated increase in revenue does not exceed the anticipated increase in cost , it does have better deiiference than before expansion.