Tri-State Shipping (TSS) operates a transportation company that offers two services between Chicago and the Twin Cities:

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Question:

Tri-State Shipping (TSS) operates a transportation company that offers two services between Chicago and the Twin Cities: long-haul freight and intra-city package delivery. The company currently operates 20 long-haul tractor-trailers and 30 local delivery vans. The company employs 15 long-haul drivers and 30 delivery van drivers. Recently, due to COVID-19, TSS has been contracted by several grocery store chains to provide local grocery delivery. This is being handled by the intra-city package delivery segment. It is unknown whether the demand for this service will continue post-pandemic.

TSS must maintain a station in each city to receive and load freight for both services. The company employs 20 warehouse laborers. Annual operating costs for the two stations are $2,000,000, excluding labor and depreciation. All station costs are allocated equally between the long haul and delivery services.

TSS’s revenue is a function of miles driven and averages $5 per mile for the long-haul freight services. Revenue for the intra-city package delivery service averages about $8 per mile. The TSS segmented Income statement for last year is below:

Revenue:	Long Haul Freight	Package Delivery	Total
Long-haul (average $5 per mile)	$5,000,000		$5,000,000
Delivery (average $8 per mile)		$4,000,000	4,000,000
Total Revenue	$5,000,000	$4,000,000	$9,000,000
Expenses:
Driver Labor	$1,000,000	$900,000	$1,900,000
Warehouse labor allocated	250,000	250,000	500,000
Vehicle Operating Costs	2,000,000	500,000	2,500,000
Station Operating Costs	1,000,000	1,000,000	2,000,000
Depreciation (Stations & Vehicles)	1,500,000	500,000	2,000,000
Total expenses	$5,750,000	$3,150,000	$8,900,000
Operating Income (Loss)	$(750,000)	850,000	$100,000

Mr. Axel, the President of TSS, reviewed the financial statement and thought the company should drop the long-haul service because it was losing money. The Controller of TSS knew the company would still need the two stations and warehouse labor for the delivery service and that those costs would be unavoidable. However, the Vice-President for Finance said the freed-up space could probably rent for $1,500,000 annually and the existing long-haul trucks could be sold for about $3 million cash.

QUESTIONS/REQUIRED:

A. Articulating the Problem – Why is the company considering dropping the long-haul trucking segment? What factors would they want to consider before doing so? Who are the stakeholders in such a decision?

B. Evidence – Compute the financial advantage (or disadvantage) of dropping the long-haul service next year (year of sale) and for the subsequent year(s). BE SURE TO SHOW ALL COMPUTATIONS TO RECEIVE CREDIT.

C. Identify Possible Solutions – Based on your answers to a and b, and the other information provided, what options could the company take to address management’s concerns and ensure the long-term health of the company? Name as many as you can think of, given the information in the problem.

D. Recommend Solutions – Based on your findings, would you recommend TSS drop or retain the long-haul service? Of the potential solutions, you named in letter c, which would you recommend the company take? Explain why you reached your decision.