In three units of study, there will be application-focused cases due at the beginning of the class that will be provided by the instructor. These cases will be complex in nature and will require the application of course concepts to real-word business situations. Each case will have an associated rubric to highlight expectations. All submissions must be of professional quality and done in Microsoft Word, Microsoft Excel, or submitted as a PDF.

Objectives

To apply cost-volume profit analysis to a business decision

To calculate operating income and perform sensitivity analysis on operating income given changes in variables.

To illustrate the importance of hidden (undirected) issues that arise from a detailed analysis.

To prepare a coherent report and integrated analysis that meets specific user needs.

Instructions

In order to complete your case analysis successfully, you must

identify the role you are playing,

assess user needs

analyze user needs or issues (qualitatively and quantitatively), and

provide a recommendation and conclusion.

An average grade will result from answering all questions with basic coverage and accuracy, showing all your work. Additional points come from including greater detail, astute, informed commentary where appropriate and connections to readings and other content.

Case: Cost Structures for Global Shippers Inc.

Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the oppositerelatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision:

Cost Information	Option A	Option B
Delivery price (revenue) per shipment	$100	$100
Variable cost per shipment delivered	$85	$60
Contribution Margin per unit	$15	$40
Fixed costs (annual)	$1,450,000	$4,700,000

Management wants you to write a professional report, answering the following questions:

Questions

1) What is the break-even point, in terms of volume (i.e., number of shipments per year), for Option A? Option B?

(2) How many shipments would have to be made under Option A to produce operating income of $43,000 for an annual period?

(3) How many shipments per month would have to be made under Option A to produce an annual operating margin equal to 11% of sales revenue?

(4) How many shipments are required under Option B to produce net income of $213,000 per year, given a corporate tax rate of 25%?

(5) Assume that for the coming year total fixed costs are expected to decrease by 8% for each of the two options. What is the new break-even point, in terms of number of shipments, for each option? By what percentage did the break-even point change for each case? How do these figures compare to the percentage increase in budgeted fixed costs?

(6) Assume an average income-tax rate of 35%. What volume (number of shipments) would be needed to generate net income of 8% of revenue for each option?

(7) Which option do you think is the more profitable one for this business? Explain.

(8) Which option do you consider to be more risky to the business? Explain (calculate degree of operating leverage to help answer this question).