Background Knowledge and context: Company 1 is a logistics company with 90 trucks and 180 trailers. They have a mutual business relationship with company 2 who is an international parts company and is one of their largest clients. Company two has approached with an idea to expand their operations, but Company 1 management is worried about the available capacity to service the request including routes, potential risks, and profitability with the proposal.

Company 2 has offered a total of $2.15 per kilometer including fuel service charge and miscellaneous fees. They want to gain an extra 2 loads per week. And would require 1,500 round-trip kilometers.

1. Assume Company 1 could service the contract with existing equipment. Use Exhibit 1 to identify the relevant costs concerning the acceptance of Company 2's request to add two additional loads per week. Which costs are not relevant? Why?

2. Calculate the contribution per kilometer and total annual contribution associated with accepting Company 2's proposal. What do you recommend? (Use 52 weeks per year in your calculations.)

3. Company 1 does a capacity analysis and concluded they can handle only one of the two additional loads with the existing capacity but an additional rig is required to handle the second load. Assume Company 1's management chooses to purchase an additional truck and trailer that can serve the needs of Company 2's needs. The incremental fixed costs with buying the additional equipment is $50,000. Compant 2 then agrees to pay $2.20 per kilometer for both loads if Company 1 signs a five-year agreement. What is the annual number of Kilometres required for Company 1 to break even, assuming they purchase the new truck and trailer rigs? And what is the expected annual increase in profitability from the new Company 2 contract ($2.20 per KM) (Use 52 weeks per year in calculations)?

4. Company 1 has good relationships with independent contractors, although a high up manager is reluctant to use them. Another possibility for expanding capacity to meet the second load requirement is to outsource the kilometers requested by Company 2 to One of their most reliable independent contractors who has quoted a rate of $1.65 per kilometer. As with question 3, assume Company 2 would agree to pay $2.20 per kilometer if Company 1 would sign a five-year contract and that Company 1 would use their own capacity to cover one of the weekly loads. This option would result in incremental fixed costs of $20,000 per year. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and billing and salaries. How many annual kilometers are required for Company 1 to break even if the second weekly load is outsourced to the independent contractors? What is the expected annual increase in profitability from Company 2's contract? What are your conclusions?

Exhibit 2: Balance Sheet COMPANY1 Balance Sheet As at June 30th, 2017 As at June 3 2017 Assets Current Assets Cash Accounts Receivable 200,000 300.000 500,000 Non-Current Assets Land Buildings 1,000,000 3,000,000 -1,250,000 18,650,000 Tractors, Trailers, and Equipment Accumulated Depreciation4.750.000 16,650,000 Total Assets 17,150,000 Liabilities Current Liabilities Accounts Payable Taxes Payable Current Portion of Long Term Debt 150,000 65,000 35.000 250,000 Non-Current Liabilities 1.865,000 1,865,000 2,115,000 S15,035,000 Notes Payable Total Liabilities Net Assets Represented by: Owner's Equity Issued Shares Retained Earnings 3.550.000 11,485,000 $15,035