Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has...
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Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives. The first is to call a common carrier (i.e., a trucking company) each time a shipment is ready to go. This alternative would have no fixed cost, but the variable cost per shipment would be about $750. At the other extreme, Ellison Seafood could lease its own refrigerated trucks. The logistics manager has determined that the yearly cost to lease three trucks would be $21,000, including insurance and prepaid maintenance. Because Ellison would have to pay the lease charge regardless of how many shipments were made, the $21,000 would be a fixed expense. On the other hand, the variable cost would drop dramatically to $50 per shipment-just enough to cover the cost of fuel and the driver's wages. Somewhere between these two extremes is the third option: a contractual arrangement with a local carrier. For a yearly fixed charge of $5,000, the local carrier would agree to make all of Ellison's deliveries at a variable cost of just $300 per delivery. The below table summarizes the three options. Capacity Alternatives and Costs for Ellison Seafood Company Fixed cost Variable cost Task 1: COMMON CARRIER None $750 CONTRACT CARRIER $5,000 $300 LEASING $21,000 $50 Build XY scatter plot for the total cost of each alternative. The Y-axis should reflect the cost and X-axis should be the number of shipments. Task 2: Find the exact output level at which two capacity alternatives generate equal costs, called the indifference point, by setting their two cost functions equal to one another and solving for the number of shipments, X. For instance, the indifference point for the common carrier and contract carrier options would be calculated as follows: Total cost of common carrier option = Total cost of contract carrier option Likewise, the same logic is applied to find the indifference point for contract carrier and leasing option Total cost of contract carrier option = Total cost of leasing Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives. The first is to call a common carrier (i.e., a trucking company) each time a shipment is ready to go. This alternative would have no fixed cost, but the variable cost per shipment would be about $750. At the other extreme, Ellison Seafood could lease its own refrigerated trucks. The logistics manager has determined that the yearly cost to lease three trucks would be $21,000, including insurance and prepaid maintenance. Because Ellison would have to pay the lease charge regardless of how many shipments were made, the $21,000 would be a fixed expense. On the other hand, the variable cost would drop dramatically to $50 per shipment-just enough to cover the cost of fuel and the driver's wages. Somewhere between these two extremes is the third option: a contractual arrangement with a local carrier. For a yearly fixed charge of $5,000, the local carrier would agree to make all of Ellison's deliveries at a variable cost of just $300 per delivery. The below table summarizes the three options. Capacity Alternatives and Costs for Ellison Seafood Company Fixed cost Variable cost Task 1: COMMON CARRIER None $750 CONTRACT CARRIER $5,000 $300 LEASING $21,000 $50 Build XY scatter plot for the total cost of each alternative. The Y-axis should reflect the cost and X-axis should be the number of shipments. Task 2: Find the exact output level at which two capacity alternatives generate equal costs, called the indifference point, by setting their two cost functions equal to one another and solving for the number of shipments, X. For instance, the indifference point for the common carrier and contract carrier options would be calculated as follows: Total cost of common carrier option = Total cost of contract carrier option Likewise, the same logic is applied to find the indifference point for contract carrier and leasing option Total cost of contract carrier option = Total cost of leasing
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Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu
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