Question

Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's general pricing policy is to set prices at $122 per cubic yard. Deliveries for 2017 were 410,000 cubic yards. Costs per cubic yard were:

Material costs	$65.70
Yard operation costs	$14.00
Administrative costs	$2.00

$2,181,200 of the estimated yard operation costs were fixed, and all of the administrative costs were fixed. In addition to the costs above, estimated fixed delivery costs were $220,000 for the year, and estimated variable delivery costs were $6.00 per mile and $42.00 per truck hour. The rate per mile reflects the fact that more miles result in more gas, oil, and maintenance. The rate per truck hour reflects the fact that trucks that are waiting at a jobsite are kept running (so the concrete mix won't solidify), and drivers continue to get paid during that time.

Near the end of 2017, Fairview Construction Company asked for a delivery of 4,800 cubic yards of concrete but was unwilling to pay the regular price; it was only willing to pay $75 per cubic yard. Preston estimated that the job would require 6,800 miles of driving and 260 truck hours. The housing market in the Pacific Northwest had slowed during recent months, leaving Preston with enough capacity to fill the order, but its sales manager was reluctant to commit to such a reduced price.

REQUIRED

If Preston accepted the offer, what would the profit or loss be (enter a loss as a negative number)?

Answer 1

Solution:

Total yard operation cost during 2017 = 410000 * $14 = $5,740,000

Fixed yard operation cost = $2,181,200

Variable yard operation cost = $5,740,000 - $2,181,200 = $3,558,800

Variable Yard operation cost per cubic yard = $3,558,800 / 410000 = $8.68

Computation of Profit from special order - Preston Concrete
Particulars	Amount
Revenue (4800 * $75)	$360,000.00
Relevant Costs:
Material cost	$315,360.00
Yard operation cost (4800 * $8.68)	$41,664.00
Variable delivery cost (6800*$6 + 260*$42)	$51,720.00
Profit (Loss) from special order	-$48,744.00