dlents a fixed rate of S3kilometer. If the hourly rate of the trucx 0 driver exp
ID: 1165288 • Letter: D
Question
dlents a fixed rate of S3kilometer. If the hourly rate of the trucx 0 driver expeeted to work 10 hours per day. The overhead cost is sddition to the labor cost (driver' s. The company charges its s $50 and each 30% of the labor cost. In o cont) and overhend cost, the company has to pay a gas driver i consumption cost for each driven kilometer. Answer the following a) If breakeven is schieved at 150 kilomet per kilometer. ers a day, calculate the gas consumption cost (3 points) v 1750 kilometers are driven a day, calculate the company's profit in that day e) If the labor cost is increased by 10%, calculate the new breakeven of the company. (1.5 points)
Explanation / Answer
Solution:
If we denote number of kilometers driven in a day by K kilometers, and gas consumption cost per kilometer by G, then for a single day, for the transport company,
Total revenue, TR = $5*K
Total costs, TC = Labor cost + overhead cost + gas consumption cost
where, Labor cost = hourly wage rate*number of hours worked in a day = $50*10 = $500
Overhead cost = 30% of labor cost = 30% of 500 = 0.3*500 = $150
Gas consumption cost = G*K
a) We have to estimate value of G. If the truck is driven for 150 kilometers in a day, then K =150
Profit = TR - TC
Breakeven occurs where profits are 0, or in other words, total revenue equals total cost. Thus, at break even point and K =150, we have
TR = TC
5*150 = 500 + 150 + G*150
So, G*150 = 750 - 650, on solving this we get, G = 100/150 = 2/3
b) Since now the truck is driven for 750 kilometers a day, we now have K = 750
Evaluating profits: Profit = (5*750) - (500 + 150 + (2/3)*750)
Profit = 3750 - 1150 = 2600. So, in tis case, profit earned = $2,600
c) We have to evaluate the value of K for which in this case, the transport company achieves it's breakeven point.
Labor cost has increased by 10%. So, new labor cost = initial labor cost*(1 + 10%)
New labor cost = 500*(1 + 0.1) = $550
New overhead cost = 30% of new labor cost = 30% of 550 = 0.3*550 = $165
For breakeven, again total revenue = total cost
Thus, 5*K = 550 + 165 + (2/3)*K
(5 - (2/3))*K = 550 + 165
So, (13/3)*K = 715. On solving, we get K = 2145/13 = 165
So, new breakeven for the company is at 165 kilometers per day.
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