Campus Package Delivery (CPD) provides delivery services in and around Paradise. Its profits have been declining, and

Question:

Campus Package Delivery (CPD) provides delivery services in and around Paradise. Its profits have been declining, and management is planning to add an express service that is expected to increase revenue by $100,000 per year. The total cost to lease the necessary additional package delivery vehicles from the local dealer is $7,500 per year. The present manager will continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.

CAMPUS PACKAGE DELIVERY

Annual Income Statement before Expansion

Sales revenue ...........$ 304,000

Costs

Vehicle leases ........... 120,000

Labor ............... 96,000

Utilities ............... 16,000

Rent ................. 32,000

Other costs ............. 16,000

Manager’s salary .......... 48,000

Total costs .............. $ 328,000

Operating profit (loss)........ $ (24,000)

Required

a. Prepare a report of the differential costs and revenues if the express service is added.

b. Should management start the express service?

c. Are there factors beyond the differential costs and revenues that management should consider?

Dealer
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