Seeking to capitalize on the continued growth of E-retailing, Jeremy and Mark had set up Netherwell...

Transcribed Image Text:

Seeking to capitalize on the continued growth of E-retailing, Jeremy and Mark had set up Netherwell Parcels in 2004. Operating initially as a partnership, Netherwell Parcels was originally a London based venture. Despite the very competitive nature of the market, they enjoyed pleasing levels of business success. After becoming a limited company and raising funds from selling shares, the business is about to go national, delivering parcels to anywhere on the British mainland. Jeremy, who largely covers the marketing side of the firm, securing new business contracts etc., has calculated the break-even point for the expansion. In a business meeting he explained to Mark and the other shareholders that the total fixed costs, including leasing the vans etc. would be $90,000 per year, based on a quote from their current van provider who they have used since the business first began. The price customers paid to send a parcel depended on size, weight and distance with some customers paying hundreds of dollars to ship particularly heavy and bulky items, though this was unusual. The starting price for sending a parcel was $3.60 and this is the price Jeremy used. Variable costs were largely comprised of wages and fuel. Jeremy used last year's petrol prices to base his calculations on, arriving to the conclusion of $1.25 variable costs per parcel. Jeremy explained that the business would need to ship just under 38,300 parcels to break even. Mark said this figure worried him as it was higher than he had expected and he was not sure the calculation was correct. Other shareholders also expressed concern. Upon reviewing the figures, a member of the board said she felt the vans could be leased for $20,000 less per year by using another company she knew of and this would be the best way to reduce the break-even point. Case One Questions: 1. 2. Assess two reasons why the break-even figure given to Mark could be unreliable? Evaluate whether leasing vans from a different supplier would be the best way to lower the break-even point? Seeking to capitalize on the continued growth of E-retailing, Jeremy and Mark had set up Netherwell Parcels in 2004. Operating initially as a partnership, Netherwell Parcels was originally a London based venture. Despite the very competitive nature of the market, they enjoyed pleasing levels of business success. After becoming a limited company and raising funds from selling shares, the business is about to go national, delivering parcels to anywhere on the British mainland. Jeremy, who largely covers the marketing side of the firm, securing new business contracts etc., has calculated the break-even point for the expansion. In a business meeting he explained to Mark and the other shareholders that the total fixed costs, including leasing the vans etc. would be $90,000 per year, based on a quote from their current van provider who they have used since the business first began. The price customers paid to send a parcel depended on size, weight and distance with some customers paying hundreds of dollars to ship particularly heavy and bulky items, though this was unusual. The starting price for sending a parcel was $3.60 and this is the price Jeremy used. Variable costs were largely comprised of wages and fuel. Jeremy used last year's petrol prices to base his calculations on, arriving to the conclusion of $1.25 variable costs per parcel. Jeremy explained that the business would need to ship just under 38,300 parcels to break even. Mark said this figure worried him as it was higher than he had expected and he was not sure the calculation was correct. Other shareholders also expressed concern. Upon reviewing the figures, a member of the board said she felt the vans could be leased for $20,000 less per year by using another company she knew of and this would be the best way to reduce the break-even point. Case One Questions: 1. 2. Assess two reasons why the break-even figure given to Mark could be unreliable? Evaluate whether leasing vans from a different supplier would be the best way to lower the break-even point?