Case 9-6: Profit PlanningâChoice of Cost Structure
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
How many deliveries would have to be made under Alternative #2 togenerate an after-tax profit, ÏA, of $100,0000 per year, assuming atax rate of, say, 45%?
Assume that for the coming year total fixed costs are expectedto increase by 10% for each of the two alternatives. What is thenew break-even point, in terms of number of deliveries, for eachdecision alternative? By what percentage did the break-even pointchange for each case? How do these figures compare to thepercentage increase in budgeted fixed costs?
Assume an average income-tax rate of 40%. What volume (number ofdeliveries) would be needed to generate an after-tax profit, ÏA, of5% of sales for each alternative?
Case 9-6: Profit PlanningâChoice of Cost Structure
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
How many deliveries would have to be made under Alternative #2 togenerate an after-tax profit, ÏA, of $100,0000 per year, assuming atax rate of, say, 45%?
Assume that for the coming year total fixed costs are expectedto increase by 10% for each of the two alternatives. What is thenew break-even point, in terms of number of deliveries, for eachdecision alternative? By what percentage did the break-even pointchange for each case? How do these figures compare to thepercentage increase in budgeted fixed costs?
Assume an average income-tax rate of 40%. What volume (number ofdeliveries) would be needed to generate an after-tax profit, ÏA, of5% of sales for each alternative?