Over-land Trucking and Freight has a long-established and mutually beneficial business relationship with a major international automotive parts company, FHP Technologies. Management at FHP has approached Over-land with a request to provide additional routes that are important to the efficiency of its supply chain. Over-land?s management wishes to nurture the business relationship with FHP but is concerned about the available capacity to service the new routes, potential risks, and profitability associated with FHP?s request.

PROPOSAL/BACKGROUND: Management at FHP has asked Over-land to consider adding two dry van loads per week; each load would require 1,500 round-trip miles. Because FHP is a long-term client with a strong financial position, the company?s management has asked for a very favorable rate of $2.15 per mile including FSC and all miscellaneous fees. Roger believes the potential volume of freight from FHP can be used to grow Over-land?s business and profitability. There is also risk associated with not taking the new lines. If Over-land does not accept the new routes, another trucking line will, thus building loyalty with FHP. FHP is a stable, solvent company that presents no question of collection, thus ensuring a reliable cash ow. If FHP decides to restructure its supply chain in the future, Over-land could land itself in the undesirable position of holding dedicated assets (trucks and trailers) for routes that no longer exist. The owner?s aversion to increased debt levels further exacerbates concerns about acquiring additional xed assets. Perhaps Over- land could service the initial demand with existing equipment. But, as additional routes are added in the future, Over-land must acquire more tractor-trailer rigs or consider outsourcing the miles by using independent contractors.

QUESTION:

Over-land can increase capacity in different ways to accommodate the additional loads if they accept FHP?s contract. Why might Over-land use an independent operator (variable cost of $65/mile) over purchasing a rig and hiring a driver for a lower variable cost ($1.39/mile)? Calculate at what point (in miles) Over-land would be indifferent between purchasing a new rig and using an independent operator.

Exhibit 1 presents Over-land Trucking and Freight?s income from operations for the year ending December 31, 2013.

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Exhibit 2 Over-land Balance Sheet Over-land Trucking and Freight Balance Sheet For the year ending December 31, 2013 Assets Current Assets Cash Accounts Receivable Total Property Plant and Equipment Land Buildings Accumulated Depreciation Buildings Tractors, Trailers, and Equipment Accumulated Depreciation Total Total Assets Liabilities and Equity Current Liabilities Accounts Payable Taxes Payable Current Portion of Long-Term Debt Total Current Liabilities Long-Term Liabilities Notes Payable Total Long-Term Liabilities Total Liabilities Owner's Equity Contributed Capital Retained Earnings Total Owner's Equity Total Liabilities and Owner's Equity $200,000 300,000 1,000,000 3,000,000 (1,250,000) 18,650,000 (4,750,000) 150,000 65,000 35,000 1,865,000 3,550,000 11,485,000 $500,000 $16,650,000 $17,150,000 $250,000 $2,115,000 $15,035,000 $17,150,000 Generally Accepted Accounting Principles (GAAP) but presents costs by behavior. Exhibit 2 presents Over-land Trucking and Freight's balance sheet for the year ending December 31, 2013. Exhibit 1 Income from Operations (All financial information in the case has been scaled and disguised for educational purposes.) Over-land Trucking and Freight Income from Operations For the year ending December 31, 2013 Revenue Line Haul Fuel Surcharge Miscellaneous Total Revenue Variable Expenses Insurance Fuel Oil Lubricants Tolls Parts and Small Tools Hourly Wages: Drivers Trailer Pool Expense Total Variable Fixed Expenses Insurance General Liability Physical Damage Workers Compensation Health Insurance Security Depreciation Salaries, Benefits (Garage) Salaries, Benefits (Office) Bad Debt Expense Permits Rental Equipment Payroll Taxes Accounting Fees, Supplies, Computer Maintenance. Miscellaneous Total Variable Income from Operations FYE 12/31/2013 $20,925,280 4,950,160 450,120 $26,325,570 675,120 8,775,190 112,700 112,550 787,630 4,950,160 255,120 15,638,480 112,620 225,010 226,000 224,500 111,750 2,137,500 675,000 1,012,520 113,500 111,520 1,013,000 562,500 112,350 337,510 6,975,280 $3,681,810 Per Mile $1.86 0.44 0.04 $2.34 0.06 0.78 0.01 0.01 0.07 0.44 0.02 1.39 0.01 0.02 0.02 0.02 0.01 0.19 0.06 0.09 0.01 0.01 0.09 0.05 0.01 0.03 0.62 $0.33 Exhibit 2 Over-land Balance Sheet Over-land Trucking and Freight Balance Sheet For the year ending December 31, 2013 Assets Current Assets Cash Accounts Receivable Total Property Plant and Equipment Land Buildings Accumulated Depreciation Buildings Tractors, Trailers, and Equipment Accumulated Depreciation Total Total Assets Liabilities and Equity Current Liabilities Accounts Payable Taxes Payable Current Portion of Long-Term Debt Total Current Liabilities Long-Term Liabilities Notes Payable Total Long-Term Liabilities Total Liabilities Owner's Equity Contributed Capital Retained Earnings Total Owner's Equity Total Liabilities and Owner's Equity $200,000 300,000 1,000,000 3,000,000 (1,250,000) 18,650,000 (4,750,000) 150,000 65,000 35,000 1,865,000 3,550,000 11,485,000 $500,000 $16,650,000 $17,150,000 $250,000 $2,115,000 $15,035,000 $17,150,000 Generally Accepted Accounting Principles (GAAP) but presents costs by behavior. Exhibit 2 presents Over-land Trucking and Freight's balance sheet for the year ending December 31, 2013. Exhibit 1 Income from Operations (All financial information in the case has been scaled and disguised for educational purposes.) Over-land Trucking and Freight Income from Operations For the year ending December 31, 2013 Revenue Line Haul Fuel Surcharge Miscellaneous Total Revenue Variable Expenses Insurance Fuel Oil Lubricants Tolls Parts and Small Tools Hourly Wages: Drivers Trailer Pool Expense Total Variable Fixed Expenses Insurance General Liability Physical Damage Workers Compensation Health Insurance Security Depreciation Salaries, Benefits (Garage) Salaries, Benefits (Office) Bad Debt Expense Permits Rental Equipment Payroll Taxes Accounting Fees, Supplies, Computer Maintenance. Miscellaneous Total Variable Income from Operations FYE 12/31/2013 $20,925,280 4,950,160 450,120 $26,325,570 675,120 8,775,190 112,700 112,550 787,630 4,950,160 255,120 15,638,480 112,620 225,010 226,000 224,500 111,750 2,137,500 675,000 1,012,520 113,500 111,520 1,013,000 562,500 112,350 337,510 6,975,280 $3,681,810 Per Mile $1.86 0.44 0.04 $2.34 0.06 0.78 0.01 0.01 0.07 0.44 0.02 1.39 0.01 0.02 0.02 0.02 0.01 0.19 0.06 0.09 0.01 0.01 0.09 0.05 0.01 0.03 0.62 $0.33

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