Case 9-6: Profit PlanningâChoice of CostStructure
The owner of a package delivery business is currently evaluatingthe choice between two different cost structures, based on how thedelivery personnel are paid. One option (hereafter, âAlternative#1â) has relatively higher short-term fixed costs, while the otheroption (hereafter, âAlternative #2â) has the reverseâthat is,relatively higher variable costs in its cost structure. (Forsimplicity in this example we hold the delivery cost per package,that is, the selling price per unit is constant. Selling price isindependent of the cost-structure choice.) The following tablecontains pertinent information for creating the CVP model for eachdecision alternative:
Decision Inputs (Data)
Cost Structure Alternative #1
Cost Structure Alternative #2
Delivery price (i.e., revenue) per package
$60
$60
Variable cost per package delivered
$48
$30
Contribution margin per unit
$12
$30
Fixed costs (per year)
$600,000
$3,000,000
Requirements
1. Assume an average income-tax rate of 40%. What volume (numberof deliveries) would be needed to generate an after-taxprofit, ÏA, of 5% of sales for each alternative?
Case 9-6: Profit PlanningâChoice of CostStructure
The owner of a package delivery business is currently evaluatingthe choice between two different cost structures, based on how thedelivery personnel are paid. One option (hereafter, âAlternative#1â) has relatively higher short-term fixed costs, while the otheroption (hereafter, âAlternative #2â) has the reverseâthat is,relatively higher variable costs in its cost structure. (Forsimplicity in this example we hold the delivery cost per package,that is, the selling price per unit is constant. Selling price isindependent of the cost-structure choice.) The following tablecontains pertinent information for creating the CVP model for eachdecision alternative:
Decision Inputs (Data) | Cost Structure Alternative #1 | Cost Structure Alternative #2 |
Delivery price (i.e., revenue) per package | $60 | $60 |
Variable cost per package delivered | $48 | $30 |
Contribution margin per unit | $12 | $30 |
Fixed costs (per year) | $600,000 | $3,000,000 |
Requirements
1. Assume an average income-tax rate of 40%. What volume (numberof deliveries) would be needed to generate an after-taxprofit, ÏA, of 5% of sales for each alternative?