Overland Trucking
1. Relevant costs that would be incurred with accepting FHP’s proposal would be insurance, fuel, oil lubricants, tolls, parts and small tools, hourly wages for drivers and the trailer pool expense. Fixed costs are not relevant as they will be incurred regardless if Overland accepts the deal or not. These expenses are a fixed amount that do not fluctuate with the number of shipments the company does.
2. The contribution of each mile is $0.76. FHP proposed a price of $2.15/mile that Overland could charge for line haul, fuel surcharge and miscellaneous fees. The variable costs incurred are $.06 for insurance, 0.78 for fuel, 0.01 for oil lubricants, 0.01 for tolls, 0.07 for parts and small tools, 0.44 for hourly wages and 0.02 …show more content…
Profit= Price-Variable Costs
=$2.20-1.65= $0.55/mile
Breakeven units= Fixed Costs/UCM
=$20,000/0.55=36,363.64 miles per year
Incremental UCM= $0.55/mile * 3000 miles* 52 weeks= $85,800 per year
Incremental profit=$85,800-20,000= $65,800 per year
$65,800 * 5 years= $329,000 over the life of the 5 year contract
6. Overland might use an independent contractor because they don’t want to incur any debt when purchasing a rig. Using a contractor might also help them increase the efficiency of their organization not need to use their own rig for the two hauls a week as well as the opportunity for increased staffing flexibility as they won’t need to use their own drivers for these hauls. Another benefit would be splitting the legal costs with the contracted company in the case that any accidents on the road. Independent contractors are not considered full time employees with the company so they don’t have to provide them with a benefit package.
Incremental profit of In-House= Incremental profit of outsourcing
(X miles* 52 weeks* $0.81 UCM) - $50,000 = (X miles * 52 weeks* $0.55 UCM) - …show more content…
I would recommend they purchase the additional rig and provide services in house because they can earn more money over the life of the 5 year contract. The $20,000 is incurred annually while the cost of purchasing a rig is a one-time $50,000 expense.
7. J.B. Hunt and Landstar have differing cost structures as J.B. Hunt owns their own rigs and trailers while Landstar outsources their loads to third party contractors. J.B. Hunt will have higher fixed costs but lower variable costs. Landstar will have lower fixed costs but higher variable costs. During periods of high economic demand J.B. Hunt will be able to generate a higher profit because they have a higher contribution margin. As sales increase their overall profitability will be higher than Landstar’s because fixed costs are unaffected by the level of sales. Landstar has a less risky cost structure during poor economic times. They have lower fixed costs and don’t need as many sales to cover them. Although their variable costs are higher, with the lower amount of sales generated they will be able to cover fixed costs quicker than J.B.
1. Relevant costs that would be incurred with accepting FHP’s proposal would be insurance, fuel, oil lubricants, tolls, parts and small tools, hourly wages for drivers and the trailer pool expense. Fixed costs are not relevant as they will be incurred regardless if Overland accepts the deal or not. These expenses are a fixed amount that do not fluctuate with the number of shipments the company does.
2. The contribution of each mile is $0.76. FHP proposed a price of $2.15/mile that Overland could charge for line haul, fuel surcharge and miscellaneous fees. The variable costs incurred are $.06 for insurance, 0.78 for fuel, 0.01 for oil lubricants, 0.01 for tolls, 0.07 for parts and small tools, 0.44 for hourly wages and 0.02 …show more content…
Profit= Price-Variable Costs
=$2.20-1.65= $0.55/mile
Breakeven units= Fixed Costs/UCM
=$20,000/0.55=36,363.64 miles per year
Incremental UCM= $0.55/mile * 3000 miles* 52 weeks= $85,800 per year
Incremental profit=$85,800-20,000= $65,800 per year
$65,800 * 5 years= $329,000 over the life of the 5 year contract
6. Overland might use an independent contractor because they don’t want to incur any debt when purchasing a rig. Using a contractor might also help them increase the efficiency of their organization not need to use their own rig for the two hauls a week as well as the opportunity for increased staffing flexibility as they won’t need to use their own drivers for these hauls. Another benefit would be splitting the legal costs with the contracted company in the case that any accidents on the road. Independent contractors are not considered full time employees with the company so they don’t have to provide them with a benefit package.
Incremental profit of In-House= Incremental profit of outsourcing
(X miles* 52 weeks* $0.81 UCM) - $50,000 = (X miles * 52 weeks* $0.55 UCM) - …show more content…
I would recommend they purchase the additional rig and provide services in house because they can earn more money over the life of the 5 year contract. The $20,000 is incurred annually while the cost of purchasing a rig is a one-time $50,000 expense.
7. J.B. Hunt and Landstar have differing cost structures as J.B. Hunt owns their own rigs and trailers while Landstar outsources their loads to third party contractors. J.B. Hunt will have higher fixed costs but lower variable costs. Landstar will have lower fixed costs but higher variable costs. During periods of high economic demand J.B. Hunt will be able to generate a higher profit because they have a higher contribution margin. As sales increase their overall profitability will be higher than Landstar’s because fixed costs are unaffected by the level of sales. Landstar has a less risky cost structure during poor economic times. They have lower fixed costs and don’t need as many sales to cover them. Although their variable costs are higher, with the lower amount of sales generated they will be able to cover fixed costs quicker than J.B.