Mr. Carter is the manager of Simmons Farm and Seed Company, a wholesaler of fertilizer, seed, and other farm supplies. The company has been successful in recent years primarily because of great customer serviceflexible credit terms, customized orders (quantities, seed mix, etc), and on-time delivery, among others. Global Agricultural Products, Inc., Simmons' parent corporation, has informed Carter that his budgeted net income for the coming year will be $120,000. The budget was based on data for the prior year and Mr. Carter's belief that there would be no significant changes in revenues and expenses for the coming period.

Based on the budget, shipping rate is 9.0% of sales revenue.

Following are the budget based on the prior year actual information (unit $ 000):

Sales ......................................................	$1,500
Other Variable costs (73% of sales) .....	1,095
Shipping costs (9% of sales)...................	135
Fixed costs ............................................	150
Operating income..	$120

After the determination of the budget, Mr. Carter received notice from Simmons' principal shipping agent that it was about to increase its rates from 9% to 9.9%. This carrier handles 90% of Simmons' total sales, and the remaining 10% is handled by the other carrier who continues to charge 9.0% shipping rate. Paying the increased rate will result in failure to meet the budgeted income level, and Carter is understandably reluctant to allow that to happen.

Simmons is considering the option of buying its own trucks. If Simmons purchases and uses its own trucks,

The sales revenue will go down by $70,000.

Annual depreciation expense: New trucks would have an expected life of 10 years, no salvage value and would be depreciated on a straight line basis.

In addition, it will have other truck-related fixed costs of $2,000/year.

However, the shipping rate will go down from 9% to 7.65% of sales revenue.

Required

What would be the net income if Carter accepts the principal carriers increased shipping rate?

Using cost-volume-profit analysis and the data provided, determine the maximum amount that Mr. Carter can pay for the trucks and still expect to attain budgeted net income of $120,000.

3. At what price for the trucks would Mr. Carter be indifferent between purchasing the new trucks and keeping a current carrier?