1. Consider the strategic implications (including risks) associated with expanding (or choosing not to expand) operations to meet the demands of FHP. Analyze this question from a conceptual point of view. Calculations are not necessary.
2. After a closer examination of capacity, management believes an additional rig is required to service the FHP account. Assume Cascadess 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.)
3. Cascade has business relationships with independent contractors, though Alan is reluctant to use them. Another possibility for expanding capacity is to outsource the miles requested by FHP. One of Cascades most reliable independent contractors has quoted a rate of $1.65 per mile. As with question 4, assume FHP would agree to pay $2.20 per mile if Cascade would sign a five-year contract. Further, assume Cascade would incur incremental fixed costs of $20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and office salariessuch as billing. How many annual miles are required for Cascade to break even if the miles areoutsourced? What is the expected annual increase in profitability from the FHP contract? What are your conclusions? 4a. Why might Cascade use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver?

4b. At what point would management be indifferent between the scenarios illustrated in questions 4 and 5? Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why?

Exhibit 1 Income from Operations (All financial information in the case has been scaled and disguised for educational purposes.) Cascade Trucking and Freight Income from Operations For the year ending December 31, 2013 Revenue Line Haul Fuel Surcharge Miscellaneous Total Revenue E 12/31/2013 $20,925,280 4,950,160 450,120 $26,325,570 Per Mile $1.86 0.44 0.04 $2.34 0.06 0.78 0.01 0.01 675,120 8,775,190 112,700 112.550 787,630 4,950,160 255,120 15,638,480 0.07 0.44 0.02 1.39 0.01 0.02 0.02 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 Note: Parilo values are based on 11.250.000 miles and have been rowded to two decimal places 0.02 0.01 0.19 0.06 112,620 225,010 226,000 224,500 111,750 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 0.09 0.01 0.01 0.09 0.05 0.01 0.03 0.62 S0.33 Exhibit 2 Cascade Trucking and Freight Balance Sheet For the year ending December 31, 2013 Assets Current Assets Cash Accounts Receivable Total $200,000 300.000 $500,000 Property Plant and Equipment Land Buildings Accumulated Depreciation Buildings Tractors, Trailers, and Equipment Accumulated Depreciation Total 1,000,000 3,000,000 (1,250,000) 18,650,000 4.750.000 $16.650.000 Total Assets $17,150,000 150,000 65,000 35,000 $250,000 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 1,865,000 $1.865,000 $2,115,000 3,550,000 11,485,000 $15,035,000 $17,150,000