Question
he owner of a package delivery business is currently evaluating the choice between two different cost structures, based on how the delivery personnel are paid.
he owner of a package delivery business is currently evaluating the choice between two different cost structures, based on how the delivery personnel are paid. One option (hereafter, Alternative #1) has relatively higher short-term fixed costs, while the other option (hereafter, Alternative #2) has the reversethat is, relatively higher variable costs in its cost structure. (For simplicity in this example we hold the delivery cost per package, that is, the selling price per unit is constant. Selling price is independent of the cost-structure choice.) The following table contains pertinent information for creating the CVP model for each decision alternative: Decision Inputs (Data) Cost Structure Alternative #1 Cost Structure Alternative #2 Delivery price (i.e., revenue) per package $60 $60 Variable cost per package delivered $48 $30 Contribution margin per unit $12 $30 Fixed costs (per year) $600,000 $3,000,000 (7)Assume that for the coming year total fixed costs are expected to increase by 10% for each of the two alternatives. What is the new breakpoint in terms of numbers of deliveries, for each decision alternative? By what percentage did the breakpoint change for each case? How do these figures compare to the percentage increase in budgeted fixed costs?
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