Question

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?

Answer 1

Contract Revenue (per mile)	$2.20
Variable Expenses (outsourced incremental cost per mile)	$1.65
Contribution Margin (per mile)	$0.55
Breakeven mileage:
Incremental fixed costs	$20,000
Contribution margin (per mile)	$0.55
Breakeven mileage (annual)	36,364

Expected Annual Mileage	156,000
Additional Revenue	$       343,200
Additional Variable Costs	(257,400)
Incremental fixed costs	(20,000)
Net annual benefit (from accepting proposal)	$         65,800