In order to complete your case analysis successfully, you must identify the role you are playing, assess user needs analyze user needs or issues (qualitatively and quantitatively), and

provide a recommendation and conclusion.

An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content.

Case: Cost Structures for Global Shippers Inc.

Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision:

Cost Information	Option A	Option B
Delivery price (revenue) per shipment	$100	$100
Variable cost per shipment delivered	$85	$60
Contribution Margin per unit	$15	$40
Fixed costs (annual)	$1,200,000	$4,500,000

Management wants you to write a professional report, answering the following questions:

Questions

1) What is the break-even point, in terms of volume (i.e., number of shipments per year), for Option A? Option B?

(2) How many shipments would have to be made under Option A to produce an operating income of $30,000 for an annual period?

(3) How many shipments per year would have to be made under Option A to produce an operating margin equal to 9% of the sales revenue?  

(4) How many shipments are required under Option B to produce net income of $180,000 per year, given a corporate tax rate of 40%?

(5) Assume that for the coming year total fixed costs are expected to increase by 15% for each of the two options. What is the new break-even point, in terms of a number of shipments, for each option? By what percentage did the break-even point change for each case? How do these figures compare to the percentage increase in budgeted fixed costs?

(6) Assume an average income-tax rate of 20%. What volume (number of shipments) would be needed to generate net income of 5% of revenue for each option?  

(7) Which option do you think is the more profitable one for this business? Explain.

(8) Which option do you consider to be riskier to the business? Explain (calculate the degree of operating leverage to help answer this question).

Answer rating: 100% (QA)

Solution Global Shippers Inc Breakeven point in terms of volume for Option A Breakeven point in terms of volume fixed costunit contribution margin Fixed cost 1200000 Contribution margin per unit 15 Br... View the full answer