Question

Calculate the contribution per mile and total annual contribution associated with accepting FHP's proposal. What do you recommend? (Use 52 weeks per year in your calculations.)

Consider the strategic implications (including risks) associated with expanding (or choosing not to expand) operations to meet the demands ofFHP. Analyze this question from a conceptual point of view. Calculations are not necessary.

After a closer examination of capacity, management believes an additional rig is required to service the FHP account. Assume Cascade's management chooses to invest in one additional truck and trailer that can serve the needs of FHP (at least initially). Assume the annual incremental fixed costs associated with acquiring the additional equipment is $50,000. Further, FHP would agree to pay $2.20 per mile (total including FSC and miscellaneous) if Cascade would sign a five-year contract. What is the annual number of miles required for Cascade to break even, assuming the company adds one truck and trailer?

What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.)

Answer 1

Requirement 1

Contract Revenue (per mile)	$2.15
Variable Expenses (per mile)	$1.39
Contribution Margin (per mile)	$0.76
Loads/week	2
Miles/load	1,500
Weeks/year	52
Expected Annual Mileage	156,000
Annual Contribution	$118,560

Requirement 2

First, FHP is a stable, solvent company that confirming a dependable cash flow, thus it is tactically significant for Cascade Trucking. Furthermore, the association between two businesses has been erected over the years, if Cascade does not agree to take the proposal, FHP will look for alternative company, which may decline Cascade’s situation to assign future rate. Though, on the other hand, agree to take the new routes means Cascade Trucking may employ more money on extra trucks and trailers, higher labor cost. It will take the jeopardy that suffer more debt and decline profit.

Requirement 3

Contract Revenue (per mile)	$2.20
Variable Expenses (per mile)	$1.39
Contribution Margin (per mile)	$0.81
Breakeven mileage:
Incremental fixed costs	$50,000
Contribution margin (per mile)	$0.81
Breakeven mileage (annual)	61,728
Expected Annual Mileage	156,000
Contribution margin	$126,360
Incremental fixed costs	-$50,000
Net annual benefit	$76,360