Required: Over-land's management is considering the proposal from FHP. There are many issues involving strategy, cost, risk, and capacity. Prepare a recommendation to management. Use the following questions to guide your analysis. 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.) 3. Consider the strategic implications (including risks) associated with expanding (or choosing not to expand) operations to meet the demands of FHP. Analyze this question from a conceptual point of view. Calculations are not necessary. 4. After a closer examination of capacity, management believes an additional rig is required to service the FHP account. Assume Over-land's management chooses to invest in one additional truck and trailer that can serve the needs of FHP (at least initially). Assume the annual incremental fixed costs associated with acquiring the additional equipment is $50,000. Further, FHP would agree to pay $2.20 per mile (total including FSC and miscellaneous) if Over-land would sign a five-year contract What is the annual number of miles required for Over-land to break even, assuming the company adds one truck and trailer? What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.) 5. Over-land has business relationships with independent contractors, though Alan is reluctant to use them. Another possibility for expanding capacity is to outsource the miles requested by FHP. One of Over- land's most reliable independent contractors has quoted a rate of $1.65 per mile. As with question 4, assume FHP would agree to pay $2.20 per mile if Over-land would sign a five-year contract. Further, assume Over-land would incur incremental fixed costs of $20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and office salaries such as billing. How many annual miles are required for Over-land to break even if the miles are outsourced? What is the expected annual increase in profitability from the FHP contract? What are your conclusions? 6 a. Why might Over-land use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver? t between the scenarios illustrated in questions 4 and 5? b. At what point would management be indiffere Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why? Exhibit 1 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 FYE 12/31/2013 Per Mile Line Haul S20,925.280 $1.86 Fuel Surcharge 4,950.160 0.44 Miscellaneous 450.120 0.04 Total Revenue $26,325.570 $2.34 Variable Expenses Insurance 675 120 O06 Fuel 8.776.190 0.78 Dil Lubricants 112.700 Tolls 112.550 001 Parts and Small fools Hourly Wages Drivers 4.010.160 044 Trailer Pool Expense 0.02 Tatal Variable 15.638.4I 39 Fixed Expenses Insurance Getetal Liabilily 112.620 01 Flrysical Damage 2210010 Workers Compaton P26000 224700 DSERE 0.19 OFit to page D Page view AC Depreciation 2.137,500 0.19 Salaries, Benefits (Garage) 675,000 0.06 Salaries, Benefits (Office) 1,012,520 0.09 Bad Debt Expense 113,500 0.01 Permits 111,520 0.01 Rental Equipment 1,013,000 0.09 562,500 0.05 Payroll Taxes 112,350 0.01 Accounting Fees, Supplies, Computer Maintenance 337.510 0.03 Miscellaneous 6,975.280 0.62 Total Variable $3.681,810 $0.33 Income from Operations Note fbr mile values are based on 11,250.000 miles and have been.oundd to hse dicmal plac S/Awad/Desktop/ACC560/M3_Over-land%20trucking%20ahd20IPeigcpul Oit to page D Page view A Exhibit 2 Over-land Balance Sheet Over-land Trucking and Freight Balance Sheet For the year ending December 31, 2013 Assets Current Assets Cash $200,000 Accounts Receivable 300 000 Total $500.000 Property Plant and Equipment Land 1.000,000 Buildings 3.000 000 Accumulated Depreciation Buildings (1.250.0001 Tractors, Trailers, and Equipment 18,650.000 Accumulated Depreciation 14.750.000 fatal $16.650.000 Total Assets $17.150.000 Total Assets Llablities and Equity Current Liabilities Accounts Payable 150,000 Taxes Payable 65,000 Current Portion of Long-Term Debt 35.000 Total Current Liabilities $250,000 Long-Term Liabilities Notes Payable 1,865,000 $1.865.000 $2,115.000 Total Long-Term Liabilities Total Liabilities Owner's Equity Contributed Capital 3.550,000 Retained Earnings 11.485.000 Total Owner's Equity $15.035.000 Tatal Liabilities and Owner's Equity $17.150,000 Required: Over-land's management is considering the proposal from FHP. There are many issues involving strategy, cost, risk, and capacity. Prepare a recommendation to management. Use the following questions to guide your analysis. 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.) 3. Consider the strategic implications (including risks) associated with expanding (or choosing not to expand) operations to meet the demands of FHP. Analyze this question from a conceptual point of view. Calculations are not necessary. 4. After a closer examination of capacity, management believes an additional rig is required to service the FHP account. Assume Over-land's management chooses to invest in one additional truck and trailer that can serve the needs of FHP (at least initially). Assume the annual incremental fixed costs associated with acquiring the additional equipment is $50,000. Further, FHP would agree to pay $2.20 per mile (total including FSC and miscellaneous) if Over-land would sign a five-year contract What is the annual number of miles required for Over-land to break even, assuming the company adds one truck and trailer? What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.) 5. Over-land has business relationships with independent contractors, though Alan is reluctant to use them. Another possibility for expanding capacity is to outsource the miles requested by FHP. One of Over- land's most reliable independent contractors has quoted a rate of $1.65 per mile. As with question 4, assume FHP would agree to pay $2.20 per mile if Over-land would sign a five-year contract. Further, assume Over-land would incur incremental fixed costs of $20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries and benefits of garage maintenance, and office salaries such as billing. How many annual miles are required for Over-land to break even if the miles are outsourced? What is the expected annual increase in profitability from the FHP contract? What are your conclusions? 6 a. Why might Over-land use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver? t between the scenarios illustrated in questions 4 and 5? b. At what point would management be indiffere Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why? Exhibit 1 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 FYE 12/31/2013 Per Mile Line Haul S20,925.280 $1.86 Fuel Surcharge 4,950.160 0.44 Miscellaneous 450.120 0.04 Total Revenue $26,325.570 $2.34 Variable Expenses Insurance 675 120 O06 Fuel 8.776.190 0.78 Dil Lubricants 112.700 Tolls 112.550 001 Parts and Small fools Hourly Wages Drivers 4.010.160 044 Trailer Pool Expense 0.02 Tatal Variable 15.638.4I 39 Fixed Expenses Insurance Getetal Liabilily 112.620 01 Flrysical Damage 2210010 Workers Compaton P26000 224700 DSERE 0.19 OFit to page D Page view AC Depreciation 2.137,500 0.19 Salaries, Benefits (Garage) 675,000 0.06 Salaries, Benefits (Office) 1,012,520 0.09 Bad Debt Expense 113,500 0.01 Permits 111,520 0.01 Rental Equipment 1,013,000 0.09 562,500 0.05 Payroll Taxes 112,350 0.01 Accounting Fees, Supplies, Computer Maintenance 337.510 0.03 Miscellaneous 6,975.280 0.62 Total Variable $3.681,810 $0.33 Income from Operations Note fbr mile values are based on 11,250.000 miles and have been.oundd to hse dicmal plac S/Awad/Desktop/ACC560/M3_Over-land%20trucking%20ahd20IPeigcpul Oit to page D Page view A Exhibit 2 Over-land Balance Sheet Over-land Trucking and Freight Balance Sheet For the year ending December 31, 2013 Assets Current Assets Cash $200,000 Accounts Receivable 300 000 Total $500.000 Property Plant and Equipment Land 1.000,000 Buildings 3.000 000 Accumulated Depreciation Buildings (1.250.0001 Tractors, Trailers, and Equipment 18,650.000 Accumulated Depreciation 14.750.000 fatal $16.650.000 Total Assets $17.150.000 Total Assets Llablities and Equity Current Liabilities Accounts Payable 150,000 Taxes Payable 65,000 Current Portion of Long-Term Debt 35.000 Total Current Liabilities $250,000 Long-Term Liabilities Notes Payable 1,865,000 $1.865.000 $2,115.000 Total Long-Term Liabilities Total Liabilities Owner's Equity Contributed Capital 3.550,000 Retained Earnings 11.485.000 Total Owner's Equity $15.035.000 Tatal Liabilities and Owner's Equity $17.150,000