Income from Operations (All financial information in the case has been scaled and disguised for educational purposes.) Over-land Trucking and Freight Income from Operations For the year ending December 31, 2013 Revenue Line Haul Fuel Surcharge Miscellaneous Total Revenue FE 12/31/2013 $20,925,280 4,950,160 450.120 $26,325,570 Per Mile $1.86 0.44 0.04 $2.34 Variable Expenses 0.06 0.78 0.01 Insurance Fuel Oil Lubricants Tolls Parts and Small Tools Hourly Wages: Drivers Trailer Pool Expense Total Variable 675,120 8,775,190 112,700 112.550 787,630 4,950.160 255.120 15,638,480 Fixed Expenses Insurance General Liability Physical Damage Workers Compensation Health Insurance Security Depreciation Salaries, Benefits (Garagel Salaries, Benefits Office Bad Debt Expense Permits Rental Equipment Payroll Taxes Accounting Fees, Supplies Computer Maintenance Miscellaneous Total Variable 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 0.01 0.19 0.06 0.09 337510 Income from Operations 6,975 280 $3.581.810 THE PROPOSAL AND RELATED ISSUES Management at FHP has asked Over-land to consider adding two dry van loads per week; each load would require 1,500 round-trip miles. Because FHP is a long-term client with a strong financial position, the company's management has asked for a very favorable rate of $2.15 per mile including FSC and all miscellaneous fees. Roger believes the potential volume of freight from FHP can be used to grow Over-land's business and profitability. There is also risk associated with not taking the new lines. If Over-land does not accept the new routes, another trucking line will, thus building loyalty with FHP. FHP is a stable, solvent company that presents no question of collection, thus ensuring a reliable cash flow. If FHP decides to restructure its supply chain in the future, Over-land could find itself in the undesirable position of holding dedicated assets (trucks and trailers) for routes that no longer exis. The owner's aversion to increased debt levels further exacerbates concerns about acquiring additional fixed assets. Perhaps Over- land could service the initial demand with existing equipment. But, as additional routes are added in the future, Over-land must acquire more tractor-trailer rigs or consider outsourcing the miles by using independent contractors. Exhibit 1 presents Over-land Trucking and Freight's income from operations for the year ending December 31, 2013. This statement is not prepared in accordance with RNAL 3 ts VOL 2, NO. 2, ART. 2. JUNE 2014 1. Assume Over-land could service the contract with existing equipment. Use Exhibit 1 to identify the relevant costs concerning the acceptance of FHP's request to add two additional loads per week. Which costs are not relevant? Why? 2. 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.)
