Question

1.)Calculate the operating ratios for each trucking company and submit as a percentage

Take the revenue and total, take the expenses and total and divide them for a percentage.

As a student and with some positions in the supply chain, you may be at some time required to evaluate a motor carrier. The question is how is the best way to make this evaluation?

If you get material and statistics from the carrier, you will get a volume of figures that will point out growth of sales, volume of revenue, rates per mile, miles run for the year. After they present all the numbers and statistics it would take a CPA understand and to review, you should evaluate them by taking a very close look at their OPERATING RATIO.

The operating ratio of a company is simply the expenses for the year divided by the revenue. An operating ratio of 95 would mean that for every $1.00 or revenue earned, there would be an expenditure of .95 cents of that revenue on expenses. If the operating ratio of the carrier is 101, it would mean they are in trouble for that year; 1.01 cents of expense going out for every $1.00 earned. In today’s industry, any operating ratio of 85-90 is very good, 91-96 is respectable, but 97 up should raise a red flag in your mind.

The reason you must be careful when requesting data from a carrier, is that many times they will present figures of growth: “1999 3,500,000 million in revenue, and 2000 4,218,000 in revenue”. They will cite an impressive growth rate. If the expenses are growing at the same or higher rate, they figures are not so impressive.

Assume you apply for a job with a trucking company and they give you following information to impress you. Based on each set of facts given to you, please reply if you would hire on with each of the following carriers, and give your reasons:

I. Eagle Trucking Company:    They provide the following facts. Would you hire on, why?

13.4%             Profit margin

1,460,000            Miles run

144,800            tons hauled

426,800            retained earnings

53,887             increase in profit margin

3,436,000            total revenue earned

200,400            fuel surcharge

6,300               tons per mile

3,180,000            expenses

36. cents per mile run

36,850             growth rate from 1998

II. Hawkeye Express Would you hire on after a review of their income statement as follows: Why?

850,000            Freight revenue

264,000            Wages paid to garage

154,000            insurance costs

25,000             cooler storage revenue

36,000             fuel and oil expense

1,800               fuel surcharge collected

29,000             taxes paid

24,000             garage revenue for outside repairs

412,000            loans paid to bank for equipment.

III. The Operating Ratio evaluates only the carrier’s financial strength. Assuming it is a positive one, what other factors would be important in your evaluation of a carrier? List your criteria in order of importance, with number 1 being the most important.

Answer 1

i . Operating Ratio of eagle trading company = Total Operating Expenses / Total Operating Revenue

31,80,000 / 34,36,000

92.54%

ii. Operating Ratio of haweye express = Total Operating Expenses / Total Operating Revenue

(2,64,000+1,54,000+36,000+29,000+24,000+4,12,000) / (8,50,000+25,000+1800)

919000 / 876800

104.81%

iii. i would hire Operating Ration of eagle trading company is better when compared to haweye express as it is not in a postion to cover its expenses.