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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.
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 opposite-relatively 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) $1,200,000 $4,500,000 Management wants you to write a professional report, answering the following questions: 1. Questions What is the break-even point, in terms of volume (.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 $30,000 for an annual period? 3. How many shipments per year would have to be made under Option A to produce an operating margin equal to 9% of sales revenue? How many shipments are required under Option B to produce net income of $180,000 per year, given a corporate tax rate of 40%? 5. Assume that for the coming year total fixed costs are expected to increase by 15% for each of the two options. What is the new break-even point, in terms of number of
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