Question

UberNowhereTruckingAssignment.pdf

Question #5

UberNowhere has business relationships with independent contractors, though Alan is reluctant to use them. Another possiblity for expanding capacity is to outsource the miles requested by FHP. One of UberNowhere’s most reliable independent contractors has quoted a rate of $1.65 per mile. As with question 4, assume FHP would agree to pay $2.20 per mile if UberNowhere would sign a five-year contract. Further, assume UberNowhere would incur incremental fixedcosts of $20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and office salaries such as billing. How many annual miles are required for Over-land to break even ifthe miles are outsourced? What is the expected annual increase in profitability from the FHP contract? What are your conclusions?

Answer 1

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	$76,360