Alpha Air Transport 1, Inc.

Case Study – CVP Costing

TRIECHIA LAUD
DAIANNA GUZMAN
ASHLEY GALANO
ZSAIRA AMBER RABINO
ARJAY ARELLANO
BSA 2B | Strategic Cost Management
 Contents
I. Time Context.......................................................................................................1

II. Point of View......................................................................................................1

III. Main and Secondary Problem.........................................................................1

IV. Objectives........................................................................................................1

V. Discussion of Issues............................................................................................2

I. COMPANY........................................................................................................2

II. ENVIRONMENT ANALYSIS...............................................................................2

A. SWOT Analysis..............................................................................................2

B. Context.........................................................................................................3

C. Case Study Design........................................................................................3

D. Provision of Accumulated Estimated Data..................................................4

III. PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA....................4

VI. Alternative Course of Action...........................................................................9

VII. Decision Criteria............................................................................................12

VIII. Recommendations........................................................................................15

IX. Appendices.......................................................................................................i
I. Time Context
Alpha Air Transport 1, Inc. was founded in 1987 by Will Smith, the Chief Executive
Officer (CEO). After 30 decades of its establishment, during their regular Monday meetings, the
CEO appointed Tad Phillips to present the entity’s bid structure to Factor Medical three days
after their meeting regarding their expansion into the eastern United States region and Nashville
in all their overnight and two-day shipments.

II. Point of View

Mr Tad Phillips is ably knowledgeable to solve the problem. His credibility can be
gauged by his three- year experience as the entity’s accounting analyst and Operations assistant.
Currently, he is the regular advisor of the entity’s top executives.

III. Main and Secondary Problem

Alpha Air Transport 1 Inc. is a freight forwarding company with more than 50 locations
throughout the United States. Factor Medical, one of their major accounts, is considering an
expansion into Nashville. Generally, in this case, the entity is in a dilemma whether to take the
potential expansion into a new geographic market which should follow the management’s
required financial goals; to not incur a loss during the first year and generate an income of
$50,000 for the second year of its operation.

Specifically, it meant to answer the following:

1. The Estimated Sales Volumes required to achieve breakeven.

2. The Estimated Sales Volume to achieve a certain target operating income.

IV. Objectives
Generally, this case aims to determine whether a possible expansion into a new
geographic market can achieve management’s required financial goals.

This will be done through an application of Cost-Volume Profit analysis which aids
managers make many important business decisions such as what products and services to offer.
As a step to address the primary problem, determine the projected shipping volumes and how
much the entity could charge Factor Medical to ship from Nashville expansion.

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 V. Discussion of Issues
I. COMPANY

Alpha Air Transport 1, Inc. (AAT1) is a mid-size freight forwarding company operated in
full swing 1987 established by Will Smith. Its freight network continued to expand over the
course of three decades encompassing all of over 50 locations throughout the United States.
AAT1 continued to grow from a start-up company and gradually into a national company with $
250,000,000 in revenues. And by this time, AAT1 is up to a possible expansion into the eastern
United States region.

II. ENVIRONMENT ANALYSIS

A. SWOT Analysis

Strengths

 AAT1 specializes in the shipment of unusual, time-sensitive freight with special shipping
requirements that major freight carriers couldn’t handle well in their large, monolithic shipping
systems.
 Advanced shipping systems such as sensitive electronic equipment and high-value medical
products.
 AAT1 can bundle together numerous small shipments into larger single shipments headed from
one destination to another.

Weaknesses

 AAT1 only rely on specialized trucking and air transport companies that cater to large shippers.

Opportunities

 AAT1’s possible expansion at eastern United States through opening of new distribution hub in
Nashville by Factor Medical.

Threats

 More increasing competition.

B. Context

Factor Medical, one of AAT1s largest clients on the west coast, is expanding into the
eastern US region and is going to open a new distribution hub in Nashville. It gave the first

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opportunity to AAT1 as their exclusive shipper, to present a bid for all their overnight and two-
day shipments.

Tad Phillips, the entity’s executive regular advisor, is required to present the bid in three
days following their regular Monday meetings to Factor Medical. The bid must comprise of rates
that will yield to the targeted financial goals of AAT1 regarding plant expansions; no loss shall
be incurred during the first year of operation and make at least $50,000 of operating income in
the second year.

AAT1 shall also need to provide for the estimated sales volume required to breakeven
and estimated sales volume required to achieve the targeted operating income.

C. Case Study Design

Cost-Volume Profit (CVP) analysis studies the behaviour and relationship among these
elements as changes occur in the units sold, the selling price, the variable cost per unit, or the
fixed costs of a product (Horngren, et.al, 2012). It is used to determine how changes in costs and
volume affect a company’s operating income and net income.
The phenomenon under investigation under this case is the possibility of the entity in
achieving the management’s financial goal on the potential expansion in new geographic market.
A CVP analysis approach to this case is appropriate as this calls for the determination of
estimated sales volume required to achieve breakeven and targeted operating income.

Given the nature of the case and the various data provided, CVP analysis appeared to be
the most feasible method.

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 D. Provision of Accumulated Estimated Data

Overnight Shipments
Data per Unit Zone 1 Zone 2 Zone 3 Total
Lbs. 30,000 25,000 21,750 76,750
Price 0.9 2.01 2.15 5.06
Variable Cost 0.59 1.8 2 4.39
Contribution 0.31 0.21 0.15 0.67
Margin
Table 1: Estimated Costs Associated with Overnight Shipments

2-Day Shipments
Data per Unit Zone 1 Zone 2 Zone 3 Total

Lbs. 18,300 28,250 26,700 73,250

Price 0.85 1.0 1.15 3

Variable Cost 0.59 0.78 0.96 2.33

Contribution 0.26 0.22 0.19 0.67

Margin
Table 2: Estimated Costs Associated with 2-Day Shipments

III. PRESENTATION, ANALYSIS, AND INTERPRETATION OF DATA

The purpose of this section is to analyse and discuss findings simultaneously, allowing
coherent presentation and interpretation of the results. It is logical to adopt such an approach, as
the discussion of results that follow the analysis is a key in understanding the findings of each
stage.

The discussion is divided into 11 subsections, namely, Year 1 Projected Operating

Income: Overnight Shipments, Year 1 Projected Operating Income: 2-Day Shipments, Year 1
Accumulated Projected Operating Income: Overnight and 2-Day Shipments, Year 2 Projected
Operating Income: Overnight Shipments, Year 2 Projected Operating Income: 2-Day Shipments,
Year 2 Accumulated Projected Operating Income: Overnight and 2-Day Shipments, and
Comparison of management’s financial goal and Projected financial achievement. Year 2
Projected Target Income: Overnight Shipment, Year 2 Projected Income: 2-Day Shipment, Year
2 Accumulated Target Income: Overnight and 2-Day Shipment, and Estimated Sales Volume
required to Breakeven: Overnight and 2-day.

1.1 Year 1 Projected Operating Income: Overnight Shipments

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 Zone 1 Zone 2 Zone 3 Total
Selling price 324,000 603,00 561,150 1,488,150
Variable Cost 212,400 540,000 522,000 1,274,400
Contribution 111,600 63,000 39,150 213,750

Margin
Table 3: Contribution-Margin Based Income Statement of Overnight Shipments

1.2 Year 1 Projected Operating Income: 2-Day Shipments

Zone 1 Zone 2 Zone 3 Total

Selling price 186,660 339,000 368,460 894,120
Variable Cost 129,564 264,420 307,584 701,568
Contribution 57,096 74,580 60,876 192,552

Margin
Table 4: Contribution-Margin Based Income Statement of 2-Day Shipments

1.3 Year 1 Accumulated Projected Operating Income: Overnight and 2-Day Shipments

Overnight
2-Day Shipments
Shipments Grand Total
(Total)
(Total)
Selling price 1,488,150 894,120 2,382,270
Less: Variable Cost 1,274,400 701,568 1,975,968
Contribution Margin 213,750 192,552 406,302
Less: Fixed Cost 524,800
Operating Income
(118,498)
(Loss)
Table 5: Contribution-Margin Based Income Statement of Overnight and 2-Day
Shipments

The data on table 5 shows that the entity shall incur an aggregated operating loss of
$118,498 for its expansion on Overnight and 2-Day shipments operations. (Refer to Appendix 1
for the breakdown of fixed cost, Appendix 2 for the computation of breakeven point in year 1)

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1.4 Year 2 Projected Operating Income: Overnight Shipments

Zone 1 Zone 2 Zone 3 Total

Selling price 372,600 693,450 645,323 1,711,373
Variable Cost 244,260 621,000 600,300 1,465,560
Contribution 128,340 72,450 45,023 245,813

Margin
Table 6: Contribution-Margin Based Income Statement of Overnight Shipments

1.5 Year 2 Projected Operating Income: 2-Day Shipments

Zone 1 Zone 2 Zone 3 Total

Selling price 214,659 389,850 423,729 1,028,238
Variable Cost 148,999 304,082 353,722 806,803
Contribution 65,660 85,767 70,007 221,434

Margin
Table 7: Contribution-Margin Based Income Statement of 2-Day Shipments.
1.6 Year 2 Accumulated Projected Operating Income: Overnight and 2-Day Shipments

Overnight
2-Day Shipments
Shipments Grand Total
(Total)
(Total)
Selling price 1,711,373 1,028,238 2,739,611
Less: Variable Cost 1,465,560 806,803 2,272,363
Contribution Margin 245,813 221,434 467,247
Less: Fixed Cost 535,296
Operating Income (68,049)

(Loss)

Table 8: Contribution-Margin Based Income Statement of Overnight and 2-Day

Shipments

The data on table 8 shows that the entity shall incur an aggregated operating loss of
$68,049 for its expansion on Overnight and 2-day shipments operations.

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1.7 Comparison of management’s financial goal and Projected Financial Achievement.

Difference between managements Goal and Projected achievement.

60000

40000

20000

0
Year 1 Year 2
-20000

-40000

-60000

-80000

-100000

-120000

-140000

Goal Projected

Illustration 1: Graph showing the difference between the management’s financial goal and
Projected financial achieved.

The illustration above shows that the financial goal for the first year of operation is to not
incur a loss, but, it projected an operating loss of $118, 498. On the other hand, the second year
of operation projected an operating loss of $68, 049 on which it did not earn the $50,000
operating income as the financial goal.

1.8 Year 2 Target Income: Overnight Shipments

Zone 1 Zone 2 Zone 3 Total

Selling price 686,353 571, 961 497, 606 1, 755, 920
Variable Cost 569, 294 474, 412 412,738 1, 456, 444
Contribution 117, 059 97, 549 84, 868 299, 476

Margin
Table 9: Contribution-Margin Based Income Statement of Overnight Shipment
1.9 Year 2 Target Income: 2-Day Shipments

Zone 1 Zone 2 Zone 3 Total

Selling price 418, 675 646, 316 610, 854 1, 675, 845
Variable Cost 347, 269 536, 085 506, 672 1, 390, 026
Contribution 71, 406 110, 231 104, 183 285, 820

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 Margin
Table 10: Contribution-Margin Based Income Statement of 2-Day Shipments

3.10 Year 2 Accumulated Target Income: Overnight and 2-Day Shipments

Overnight 2-Day Shipments Grand Total

Shipments (Total)
(Total)

Selling price 1, 755, 920 1, 675, 845 3, 431, 765

Less: Variable Cost 1, 456, 444 1, 390, 026 2, 846, 470

Contribution Margin 299, 476 285, 820 585, 296

Less: Fixed Cost 535, 296

Operating Income 50, 000

Table 11: Contribution-Margin Based Income Statement of Overnight and 2-Day Shipments

The data in table 11 shows that the entity shall need to have an aggregated sales of
$3,431,765 and variable cost of $2,846,470 to achieve the target income of $50, 000 for both
Overnight and 2-Day Shipments. (Refer to Appendix 4 for the computation of required sales to
achieve $50,000 target income)

3.11 Estimated Sales Volume to Achieve Breakeven: Overnight Shipment and 2- Day
Shipment for Year 2

BEP in Units Zone 1 Zone 2 Zone 3 Total

Overnight 474, 294 395, 245 343, 863 1, 213, 402

Shipment

2-Day 289, 318 446, 627 422, 122 1, 158, 067

Shipment

Total 763, 612 841, 872 765, 985 2, 371, 469

Table 12: Total Estimated Sales Volume to Achieve Breakeven for both Overnight and 2-Day
Shipments for Year 2.

The data in Table 12 shows that the entity shall need a total of 2,371,469 lbs. of total
shipments with its contract with Factor Medical to at least reach breakeven on their second year

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of operations in Nashville. (Refer to Appendix 3 for the computation of breakeven point for year
2)

VI. Alternative Course of Action

AAT1 is considering two options; to not pursue the expansion or to keep the expansion of
operations in Nashville.

The entity takes into account the decision to not pursue the operations in Nashville. Base
on the above computations, the entity found out that it would not achieve the management’s
financial goals; to not incur a loss for the first year and to earn an operating income of $50,000
for the second year of operation. During the first year, based on the estimated costs provided, the
entity forecasted an operating loss of (1,234,567). Also, the management shall incur an operating
loss of (7,654,321) for its second year of operation if it continues its expansion. The losses are
due to high fixed cost, low volume of estimated sales, and low contribution margin. Thus, the
entity did not meet the management’s financial goal.

On the other hand, the entity is also taking into account the decision to keep the
expansion of operations in Nashville. Factor Medical is one of the major accounts of the entity
which contributes 10% of the total revenues of AAT1. Thus, discontinuing the expansion may
result to losing Factor Medical as one of its clients.

The entity may consider the following to address the projected losses it may incur for the
potential expansion.

a) Increase estimated prices by 5% to achieve breakeven for the first year of operation in
Nashville.
Increasing the estimated prices by 5% for its operation in Nashville shall yield to a
breakeven or no loss which is the ultimate goal of businesses for their first year of operations.
The change shall only affect the prices but within the relevant range. (See Appendix 5 for the
supporting computation for the proposed alternatives)

Zone 1 Zone 2 Zone 3 Total

Selling price $340,116 $632,994 $589,063 $1,562,173

Variable Cost $212,400 $540,000 $522,000 $1,274,400

Contribution $127,716 $92,994 $67,063 $287,773

Margin

Table 13: Alternative Course of Action A: Overnight Shipment

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 Zone 1 Zone 2 Zone 3 Total

Selling price $195,945 $355,862 $386,788 $938,595

Variable Cost $129,564 $264,420 $307,584 $701,568

Contribution $66,381 $91,442 $79,204 $237,027

Margin

Table 14: Alternative Course of Action A: 2-Day Shipment

Overnight 2-Day Shipments Grand Total

Shipments (Total)
(Total)

Selling price $1,562,173 $938,595 $2,500,768

Less: Variable Cost $1,274,400 $701,568 $1,975,968

Contribution Margin $287,773 $237,027 $524,800

Less: Fixed Cost $524,800

Operating Income -

Table 14: Alternative Course of Action A: Overnight and 2-Day Shipment

b) Increase estimated prices by 4% to earn $50, 000 operating income for the second year
of operation in Nashville.

Increasing the estimated prices by 4% for its operation in Nashville shall yield to an
operating income of $50,000 for the second year of operation. The change shall only affect the
prices but within the relevant range.

Zone 1 Zone 2 Zone 3 Total

Selling price $388,655 $723,330 $673,129 $1,785,114

Variable Cost $244,260 $621,000 $600,300 $1,465,560

Contribution $144,395 $102,330 $72,829 $319,554

Margin

Table 15: Alternative Course of Action B: Overnight Shipment

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 Zone 1 Zone 2 Zone 3 Total
Selling price $223,909 $406,648 $441,987 $1,072,544
Variable Cost $148,999 $304,083 $353,722 $806,804
Contribution
$74,910 $102,565 $88,266 $265,741
Margin
Table 16: Alternative Course of Action B: 2-Day Shipment

Overnight
2-Day Shipments
Shipments Grand Total
(Total)
(Total)
Selling price $1,785,114 $1,072,544 $2,857,658
Less: Variable Cost $1,465,560 $806,804 $2,272,364
Contribution Margin $319,554 $265,741 $585,295
Less: Fixed Cost 535,295
Operating Income $50,000
Table 17: Alternative Course of Action B: Overnight and 2-Day Shipment

c) Increase estimated prices by 2% to achieve breakeven for the second year of operation
in Nashville.
Increasing the estimated prices by 2% for its operation in Nashville shall yield to a
breakeven in second year of operation. The change shall only affect the prices but within the
relevant range.

Year 1 Overnight & Year 2 Overnight &

2-Day Shipments 2-Day Shipments
Sales $ 2,441,443 $ 2,807,659
Less: Variable $ 1,975,968 $2,272,363

Cost
Contribution $ 465,475 $ 535,296

Margin
Less: Fixed Cost $ 524,800 $ 535,296
Operating Income ($ 59,325) -
Table 18: Alternative Course of Action C: Year 1 & 2 Overnight and 2-Day Shipments

VII. Decision Criteria

This section shall outline factors that may aide the entity in making sound decisions.
1. Profitability
Profit is the primary goal of every business. The success of a business entity
depend on its ability to continually earn profits. This is one of the principles
which an entity can adapt to make a decision. Positive versus negative profit is
important information when evaluating a business opportunity. If economic profit

11
 is negative, an entity might do better pursuing a different opportunity. If economic
profit is positive, an entity should adhere to choice. Earning a profit is important
to an entity because profitability impacts an individual or business decide if the
risk involved in a decision is worthwhile.
2. Risks
Organizational decision making often occurs in the face of uncertainty about
whether a decision will lead to benefit or disaster. Risk is the potential that a
decision will lead to a loss or an undesirable outcome. Based on the projected
contribution margin-income statement, the decision to pursue the potential
expansion shall lead to a continuous loss for two consecutive years of its
operations which would affect the performance of AAT1. On the other hand,
keeping the expansion applying the increase in prices might encourage Factor
Medical to decline AAT1’s freight service for its expansion.
3. Image and Branding
A brand image sums up consumer perceptions regarding a given brand’s overall
personality. Consumer perceptions regarding quality and benefits impact brand
image. In case AAT1 decides to not pursue the potential expansion for Factor
Medical, it might affect the public’s perception regarding the entity’s service
quality. Consumer perception of a product or service as offering poor quality or
service weakens brand image, regardless of facts to the contrary. The weakened
brand image creates a reciprocal amplification of perceptions of poor quality and
benefits.
4. Opportunity Cost

An opportunity cost is the benefit forgone activity or alternative by choosing one

opportunity instead of the next best alternative. Opportunity cost comes into play in
any decision that involves trade-off between two or more options. Abandoning the
expansion appears to be the best option when considering profitability, but departing
from it would lead to a great loss. Considering Factor Medical as one of AAT1’s
major accounts which contributes a 10% of the entity’s total revenue, abandoning the
expansion might lead Factor Medical to look for another freight company that would
cater for their whole operations. This would result to a greater loss for AAT1.

Profitability Image and Risks Opportunity

Branding Costs

Rate 40% 25% 15% 20%

Table 19: Level of impact of decision criteria.

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 The table above shows the level of impact of decision areas regarding the alternative
courses of action. Profitability has the highest level of impact with 40% rate and
Risks has the lowest impact with 15% rate.

Alternative Course of Profitability Image and Risks Opportunity

Action Branding Cost

Increase estimated
1 2 2 2
prices by 5%

Increase estimated
2 3 3 3
prices by 4%

Increase estimated
3 4 4 4
prices by 2%

Do not expand 4 1 1 1

Table 20: Degree of influence of the decision criteria on alternative courses of action.
The table above indicates the degree of influence of the decision criteria on the
entity’s alternative courses of action; 4 being the highest and 1 is the lowest.

Alternative Course Profitability Image and Risk Opportunit Total

of Action Branding y Cost
Increase estimated
.40 .50 .3 .4 1.60
prices by 5%
Increase Estimated
.80 .75 .45 .6 2.60
Prices by 4%
Increase Estimated
1.2 1 .60 .8 3.60
Prices by 2%
Do not expand 1.6 .25 .15 .2 2.20
Table 21: Weighted Decision Matrix

The table above shows that the most effective alternative course of action
based on profitability is to not expand while the least effective is increasing estimated
prices by 5%. Under Image and Branding, the most effective is increasing estimated
prices by 2% while the least is not expanding. It also shows that increasing the
estimated prices by 2% shall result to a greater risk while not expanding shall result to
lesser risk. Lastly, increasing the estimated prices appears to have the greatest impact
on opportunity cost while not expanding have the least impact. In total, increasing the

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estimated prices by 2% appears to be the most effective course of action in all aspects
of decision criteria while increasing estimated prices by 5% is the least effective.

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VIII. Recommendations
Based on the provided financial information, AAT1 should keep the expansion in
Nashville by increasing the estimated prices by 2% within the relevant range. This shows to
be the most effective alternative course of action provided by the decision matrix compared
to other alternative courses of action.

This alternative is highly affected by profitability. Despite incurring loss for the first year
and yielding breakeven for the second year, it shall earn profit for the succeeding years of
operation which would recover loss incurred for the prior year.

This also provides a lesser risk and greater feasibility compared to increasing estimated
prices by 4% and 5% which might encourage Factor Medical to decline the presented bid. An
option to abandon the expansion may also affect the relationship between AAT1 and Factor
Medical as their exclusive service provider and leads Factor Medical to look for another
freight forwarding company which will furnish for all their needed services exclusively.

This would as well strengthen the brand image of AAT1 as one of the most reliable
freight service providers which could flexibly cater every services demanded in new
geographic markets.

Lastly, this alternative shall provide great opportunities for Alpha Air Transport 1, Inc.
Expanding to new geographic market shall result to a wider customer base. Business
expansion has the potential to expose the entity’s services to a broader audience. Increasing
customer base will help convert more customers, improve sales, and enhance access to
potential clients.

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IX. Appendices
Appendix 1: Estimated Annual Fixed Cost for Nashville Operations

Estimated Costs for Nashville Office

Cost Item Amount Frequency
Rent on Office/Warehouse $3,000 Monthly $36,000
Utilities $750 Monthly $9,000
Office Supplies $250 Monthly $3,000
General Manager Salary $1,600 Weekly $83,200
Operations Supervisor Salaries $2,500 Weekly $130,000
Operations Assistant Salaries $5,000 Weekly $260,000
Furniture/Equipment Rental $300 Monthly $3,600
Total Annual Fixed Cost $524,800

Appendix 2: Breakeven Point in Pounds and in Sales (Year 1)

Estimated Monthly Contribution Margin Contribution Margin

Sales Volume per per Batch
Batch
Overnight Shipment
Zone 1 30,000 .31 9,300.00
Zone 2 25,000 .70 17,500.00
Zone 3 2,175 .15 3,262.50
2-day Shipment
Zone 1 18,300 .26 4,758.00
Zone 2 28,250 .22 6,215.00
Zone 3 26,700 .19 5,072.00
Total Contribution Margin per Batch 46,108.50

Total Annual Fixed Cost 524,800.00

Divide: Total CM per Batch 33,358.50
Breakeven per pound 15.50

Estimated Monthly Breakeven in Pounds Breakeven in Sales

Sales Volume per (EMSV * BE/lbs) (BEP in Pounds * Price)

Batch
Overnight Shipment
Zone 1 30,000 464,994 418,494.62
Zone 2 25,000 387,495 778,864.98
Zone 3 2,175 337,121 724,809.43
2-day Shipment
Zone 1 18,300 283,646 241,099.40
Zone 2 28,250 347,869 437,869.37
Zone 3 26,700 413,845 475,921.38
BEP in Pounds/Sales 2,324,970 3,077,059.17
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Appendix 3: Breakeven Point in Pounds and in Dollars (Year 2)
EMSV per Batch for Contribution Margin Contribution Margin
Year 2 (15% increase) per Batch
Overnight Shipment
Zone 1 34,500 .31 10,695.00
Zone 2 28,750 .70 6,037.50
Zone 3 25,013 .15 3,751.80
2-day Shipment
Zone 1 21,045 .26 5,471.70
Zone 2 32,488 .22 7,147.40
Zone 3 30,705 .19 5,834.00
Total Contribution Margin per Batch 38,937.28

Total Annual Fixed Cost for Year 2(524800*1.15) 535,296.00

Divide: Total CM per Batch 38,937.28
Breakeven per pound 13.75

Estimated Monthly Breakeven in Pounds Breakeven in Sales

Sales Volume per (EMSV * BE/lbs) (BEP in Pounds * Price)

Batch
Overnight Shipment
Zone 1 34,500 474,294 426,864.51
Zone 2 28,750 395,245 794,442.28
Zone 3 25,013 343,863 739,305.62
2-day Shipment
Zone 1 21,045 289,319 245,921.39
Zone 2 32,488 446,627 446,626.76
Zone 3 30,705 422,122 485,439.81
BEP in Pounds/Sales 2,371,469 3,138,600.36

Appendix 4: Target Sales in Pounds and in Dollars to Achieve $50,000 Income (Year 2)
EMSV per Batch for Contribution Margin Contribution Margin
Year 2 (15% increase) per Batch
Overnight Shipment
Zone 1 34,500 .31 10,695.00
Zone 2 28,750 .70 6,037.50
Zone 3 25,013 .15 3,751.80
2-day Shipment
Zone 1 21,045 .26 5,471.70

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 Zone 2 32,488 .22 7,147.40
Zone 3 30,705 .19 5,834.00
Total Contribution Margin per Batch 38,937.28

Total Annual Fixed Cost for Year 2(524800*1.15) $ 535,296.00

Add: Target Income 50,000.00
Totals 585,296.00
Divide: Total CM per Batch 38,937.28
Breakeven per pound $ 15.03

Estimated Monthly Target Sales in Pounds Target Sales

Sales Volume per (EMSV * BE/lbs) (BEP in Pounds * Price)

Batch
Overnight Shipment
Zone 1 34,500 518,596 466,736.33
Zone 2 28,750 432,163 868,648.17
Zone 3 25,013 375,982 808,361.39
2-day Shipment
Zone 1 21,045 316,344 268,891.99
Zone 2 32,488 488,344 488,344.49
Zone 3 30,705 461,550 530,782.93
Target Sales in Pounds/Dollars 2,592,980 3,431,765.29

Appendix 5: Supporting Computations for Alternative Courses of Action

a) Price increase computations to achieve breakeven for the first year of operations on
Nashville. (5% increase in price)

Total Annual Fixed Cost 524,800.00

Add: Total Annual Variable Cost 1,975,968.00
Target Annual Sales 2,500,768.00

Price to Breakeven
Estimated Annual Target Sales
Ratio (Target Annual Sales *
in Year 1
Sales per Batch Ratio) (Target Sales/
Monthly Sales)
Overnight Shipment
Zone 1 360,000 .14 340,116.29 $ 0.94
Zone 2 300,000 .25 632,994.20 $ 2.11
Zone 3 261,000 .24 589,062.52 $ 2.26
2-day Shipment
Zone 1 219,600 .08 195,944.77 $ 0.89
Zone 2 399,000 .14 355,862.41 $ 1.05

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Zone 3 240,400 .15 386,787.80 $ 1.21

iv
 b) Price increase computations to achieve $50,000 income for the second year of operations
on Nashville. (4% increase in price)

Total Annual Fixed Cost for Year 2(524800*1.15) $ 535,296.00

Add: Target Income 50,000.00
Annual Variable Cost 2,272,363.20
Target Annual Sales 2,857,659.20

Estimated Annual Target Sales Target Price

Ratio (Target Annual Sales * (Target Sales/
Sales per Batch Ratio) Monthly Sales)
Overnight Shipment
Zone 1 414,000 .14 388,655 $ 0.94
Zone 2 345,000 .25 723,330 $ 2.10
Zone 3 300,150 .24 673,129 $ 2.24
2-day Shipment
Zone 1 252,540 .08 223,909 $ 0.89
Zone 2 389,850 .14 406,648 $ 1.04
Zone 3 368,460 .15 441,987 $ 1.20

c) Price increase computations to achieve breakeven for the second year of operations on
Nashville. (2% increase in price)

Total Annual Fixed Cost for Year 2(524800*1.15) $ 535,296.00

Add: Annual Variable Cost 2,272,363.00
Target Annual Sales 2,807,659.00

Price to Breakeven
Estimated Annual Target Sales
Ratio (Target Annual Sales *
in Year 1
Sales per Batch Ratio) (Target Sales/
Monthly Sales)
Overnight Shipment
Zone 1 414,000 .14 381,854.95 $ 0.92
Zone 2 345,000 .25 710,674.48 $ 2.06
Zone 3 300,150 .24 661,351.55 $ 2.20
2-day Shipment
Zone 1 252,540 .08 219,990.88 $ 0.87
Zone 2 389,850 .14 399,533.42 $ 1.02
Zone 3 368,460 .15 434,253.93 $ 1.18