The Proposal and Related Issues Management at FHP has asked Cascade to consider adding two dry van loads per week; each load would require 1,500 round-trip miles. Because FHP is a long-term client with a strong financial position. the company's management has asked for a very favorable rate of $2.15 per mil lion including FSC and all miscellaneous fees. Roger believes the potential volume of freight from FFP can be used to grow Cascade's business and profitability. There is also risk associated with not taking me uew mes. If Cascade does not accept the new routes, another trucking line will, thus building loyalty with FHP. FHP is a stable, solvent company that presents no question of collection, thus ensuring a reliable cash flow. If FHP decides to restructure its supply chain in the future, Cascade could find itself in the undesirable position of holding dedicated assets (trucks and trailers) for routes that no longer exist. The owner's aversion to increased debt levels further exacerbates concerns about acquiring additional fixed assets. Perhaps Cascade could service the initial demand with existing equipment. But, as additional routes are added in the future, Cascade 'must acquire more tractor-trailer rigs or consider outsourcing the miles by using independent contractors. Exhibit 1 presents Cascade Trucking and Freight's income from operations for the year ending December 31, 2013. This statement is not prepared in accordance with Generally Accepted Accounting Principles (GAAP) but presents costs by behavior. Exhibit 2 presents Cascade Trucking and Freight's balance sheet for the year ending December 31, 2013. Required: Cascade'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 Cascade 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 Cascade'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 Cascade 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 Cascade'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 Cascade would sign a five-year contract. What is the annual number of miles required for Cascade to break even, assuming the company adds one truck and trailer? 4 What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.) 5. Cascade 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 Overland'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 Cascade would sign a five-year contract. Further, assume Cascade 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 Cascade use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver? b. At what point would management be indifferent between the scenarios illustrated in questions 4 and 5 ? Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why? The Proposal and Related Issues Management at FHP has asked Cascade to consider adding two dry van loads per week; each load would require 1,500 round-trip miles. Because FHP is a long-term client with a strong financial position. the company's management has asked for a very favorable rate of $2.15 per mil lion including FSC and all miscellaneous fees. Roger believes the potential volume of freight from FFP can be used to grow Cascade's business and profitability. There is also risk associated with not taking me uew mes. If Cascade does not accept the new routes, another trucking line will, thus building loyalty with FHP. FHP is a stable, solvent company that presents no question of collection, thus ensuring a reliable cash flow. If FHP decides to restructure its supply chain in the future, Cascade could find itself in the undesirable position of holding dedicated assets (trucks and trailers) for routes that no longer exist. The owner's aversion to increased debt levels further exacerbates concerns about acquiring additional fixed assets. Perhaps Cascade could service the initial demand with existing equipment. But, as additional routes are added in the future, Cascade 'must acquire more tractor-trailer rigs or consider outsourcing the miles by using independent contractors. Exhibit 1 presents Cascade Trucking and Freight's income from operations for the year ending December 31, 2013. This statement is not prepared in accordance with Generally Accepted Accounting Principles (GAAP) but presents costs by behavior. Exhibit 2 presents Cascade Trucking and Freight's balance sheet for the year ending December 31, 2013. Required: Cascade'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 Cascade 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 Cascade'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 Cascade 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 Cascade'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 Cascade would sign a five-year contract. What is the annual number of miles required for Cascade to break even, assuming the company adds one truck and trailer? 4 What is the expected annual increase in profitability from the FHP contract? (Use 52 weeks per year in your calculations.) 5. Cascade 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 Overland'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 Cascade would sign a five-year contract. Further, assume Cascade 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 Cascade use an independent operator if the variable cost per mile is higher than if the company had purchased a rig and hired a driver? b. At what point would management be indifferent between the scenarios illustrated in questions 4 and 5 ? Based on your analysis, would you recommend adding capacity by purchasing an additional rig or by utilizing the services of an independent contractor? Why