The owner of a package delivery business is currently evaluating the choice between two different cost structures,
Question:
The owner of a package delivery business is currently evaluating the choice between two different cost structures, based on how the delivery personnel are paid. One option (hereafter, "Alternative #1") has relatively higher short-term fixed costs, while the other option (hereafter, "Alternative #2") has the reverse"that is, relatively higher variable costs in its cost structure. (For simplicity in this example we hold the delivery cost per package, that is, the selling price per unit is constant. Selling price is independent of the cost-structure choice.) The following table contains pertinent information for creating the CVP model for each decision alternative:
Decision Inputs (Data) | Cost Structure Alternative #1 | Cost Structure Alternative #2 |
Delivery price (i.e., revenue) per package | $60 | $60 |
Variable cost per package delivered | $48 | $30 |
Contribution margin per unit | $12 | $30 |
Fixed costs (per year) | $600,000 | $3,000,000 |
Assume an average income-tax rate of 40%. What volume (number of deliveries) would be needed to generate an after-tax profit, ?A, of 5% of sales for each alternative?
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins