Now your boss has asked you to look into several compensation proposals for the

Question

Now your boss has asked you to look into several compensation proposals for the company drivers. Despite the fact that your boss is starting to get on your nerves with all of these demands, you figure you’d better perform well if you have any hope to be the controller in the foreseeable future. One of the major expenses for HZMT is driver salaries. The company has been paying drivers $5,200 per quarter. The average revenue generated per customer is $480 per shipment/trip. HZMT estimated that 20 shipments/trips would be contracted each quarter. Base your answers to the following questions on this information.

Required

Part I

Is the $5,200 a fixed, variable, or mixed cost?

Compute the profit assuming there are 20 shipments.

Compute the profit assuming a 10% decrease in shipments. What is the percentage change in profitability? Why is there a difference between the percent change in profitability and the percent change in shipments?

What if instead that the drivers’ union has proposed getting paid $360 per shipment. Assume the shipment fee remains at $600/shipment. Is the $360 per shipment a fixed, variable, or mixed cost?

Part II

Suppose HZMT had the following cost structure: shipping revenue--$81,250 (per unit = $25), variable expenses--$48,750 (per unit = $15), and fixed costs-$13,000.

What is the total contribution margin?

What is the per unit contribution margin?

What is the breakeven point in units?

What is the breakeven point in dollars?

What is the impact on the breakeven point (number of units) if management spends an additional $2,000 on an advertising program?

Explanation / Answer

Part-I $ 5200 is fixed Cost Profit Revenue 9600 Driver payment 5200 Profit 4400 Profit % 45.83% if decrease by 10% Profit Revenue (20*90%*480) 8640 Driver payment 5200 Profit 3440 Profit % 39.81% Change in Profitability 6.02% Part-II Total Contrbution margin Revenue- Variable Expense 81250-48750 = 32500 Per Unit Contribution margin = Revenue per unit - Variable Expense per unit 25-15 10 Break Even point in Units Fixed Cost/Contribution margin per unit 130000/10 = 13000 Break Even points in dollars = Fixed Cost/Contribtion margin % Contribution margin % = 40.0% 32500/81250 Break Even points in dollars = 32500

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