Lyle MacDonald owns a small local delivery company located in Fredericton, New Brunswick. He started the business five years ago in an effort to create a balance in his life after a ten-year career in the finance industry. The company employs seven drivers at an average compensation of $40,000 each, including all benefits. The three-person administrative team of the company- consisting of a receptionist, a dispatcher and an accountant-average $50,000 each in compensation.
Lyle works with one other person as the sales team for the company and they each earn $60,000 in salary each year. The company pays no incentives on individual sales, but Lyle commits that 25 percent of pre-tax income will be set aside as a bonus pool to be shared by all employees. Unfortunately, the company has yet to earn a profit, so no additional compensation has been received by anyone within the company.
During a typical year, the company delivers about 120,000 packages for a variety of customers. Kyle instituted a single pricing policy of $10 per package no matter where it was being delivered or how many individual packages were delivered to a single location. In analyzing the pattern of activity for the company, Lyle determined that about half the customers required deliveries of single packages to certain locations, while the remaining customers required deliveries of multiple packages to a single location. On average the latter customers sent three packages to a single location.
Lyle also determined that 60 percent of the deliveries were within two kilometres of the city centre, 20 percent were within a radius of five kilometres of the city centre but outside the two kilometre radius, and the balance were outside a five-kilometre radius. The farther the destination was from the city centre, the more time it took to deliver.
The company rents a facility on the outskirts of town at a cost of $180,000 per year. It spends $160,000 each year on gasoline and $125,000 on repairs to the automobiles. The final operating expense is for new uniforms for the drivers, replacement uniforms, and other miscellaneous driver-related costs, which total about $150,000 each year. The administrative expenses of the company are $75,000 per year and advertising is $100,000.
Lyle believes that the single rate for each package is perhaps the problem in achieving profit- ability, as multiple deliveries by one customer to a single location are less expensive to handle than single packages. He also believes that covering different distances at the same cost is a mis- take. He has asked you to help him analyze his costs and develop a system that will enable him to generate a pre-tax profit in the region of $250,000 per year so that he can share it with his employees and have a reasonable level of profit for himself.
Required:
Analyze the operations of the company and develop an approach to costing and pricing that will accomplish Lyle's objectives.