Question
Mr Harvey Spector is the sole owner of Pearson Delivery Company (PDC) which is a logistics company transferring goods between two cities: New York and
Mr Harvey Spector is the sole owner of Pearson Delivery Company (PDC) which is a logistics company transferring goods between two cities: New York and Washington DC. Mr Spector opened a small warehouse in each of the two cities which incurs the following costs:
- Rent: $2,500 per month for each warehouse
- Insurance: $4,000 per year for all the trucks
- Miscellaneous expenses: $500 per month
- Annual depreciation: $4,000 per truck
Mr Spector runs a fleet of 10 trucks, which run to and from New York and Washington DC, totaling 700 kms per roundtrip. He charges $1,200 per roundtrip. The trucks take 4 days to cover one roundtrip. One truck can operate at most (maximum capacity) 80 roundtrips a year involving the following costs:
- Fuel costs: $0.5 per km
- Wear/tear cost: $0.2 per km
- Annual maintenance charges: $6,000 per annum
- Toll tax: $20 per roundtrip
- Food expense for truck staff: $40 per roundtrip
In both cities, the cargo must be loaded and unloaded. This cost is outsourced at $40 per loading/unloading of truck.
Mr Spector also hired other staff to operate his trucks and manage his warehouses, incurring additional costs as following:
- Supervisor for each warehouse: $500 per month
- Driver for each truck: $500 per month
- Cleaner for each truck: $200 per month
Before the start of the financial year, because of prolonged covid-19 pandemic, the economy went into recession. Mr Spectors company is not sure about the number of delivery orders that would be received in the upcoming financial year.
However, due to existing goodwill the company got proposals for annual contracts, at the current prices from two firms: Keele Manufacturers Ltd (KML) dealing in glass products and Touche Marble Manufacturers (TMM) dealing in marble floorings. Both companies agreed to provide Pearson Delivery Company (PDC) orders equivalent to PDCs maximum capacity (i.e. 800 roundtrips) per year. However, the cost structure of the company has changed due to the following factors:
- Accepting proposal from KML would lead to additional protective packaging cost of $20,000 per year because this service would be outsourced to Samuel Packaging Company.
- Accepting proposal from TMM would lead to a rise in fuel costs by $0.2 per km because of additional freight weight. Also, wear and tear charges would double.
QUESTION: Compute the original Break-Even Point (in units), Break-even Point (in dollars), and Income After Tax for one year (12 months) at 100% capacity, assuming 20% tax.
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