Variable Cost and Large Vessel

If the cost system reported sales volume and/or price we would be able to conduct an activity analysis to determine an appropriate cost function to determine the best cost driver for each product.

Fundamental to all these considerations are measurement issues. Financial measures, in particular, cost measures, are needed to evaluate alternate strategies on whether to introduce a new product or service line, to determine the appropriate sale price and the consequent market position for the firm’s product.

The estimated operating costs for the new vessel assume that it would be operated in the same way as the Vital Spark. However, the new vessel should be able to handle a larger load on some routes, which could generate additional revenues, net of additional out-of-pocket costs, of as much as $100,000 per year. Moreover, a new vessel would have a useful service life of 20 years or more.

The intent of this analysis is to compare and contrast the cost structures for rail, motor carriers and air modes of transportation. Implicit in this analysis is the rapid adoption of intermodal transportation which is often optimized to specific logistics and supply chain objectives (Jennings, Holcomb, 1996).

-There is a certain point that the ship must reach, or have reached at each month.

| Use this information for questions that refer to the World Tennis Ball (WTB) Company case.

Scenario 1B: Purchase carrier at 0% tax rate. If the boat were to be commissioned in Hong Kong, where there is 0% corporate income tax, the value of the scrap would become $6,719,582 and the NPV after 25 years will be $977,267.

Solely taking a look at the graph, to accommodate future demand for growth I would recommend ocean transportation to move our products from the new facility in China. As we expect demand to grow by 10 percent annually over the next five years, it will be most beneficial to utilize ocean transportation as projected total costs for air becomes higher than ocean above the trade off point of 1,904,761.9 POUNDS. For example, total projected costs were calculated to be at $587,156 for air versus $630,080 for ocean at the end of 5 years. Extrapolate the graph even further into the future, with the expectation of even more growth,

Unit CM= $160 average full passenger fare – $70 average variable cost per passenger =$ 90

Athens has 200 units of capital and 100 units of labor available to produce ships and food. Troy has 100 units of capital and 150 units of labor available to produce ships and food.

per year that the ship can make, the length of individual visits, and the volume of passengers

Considering that an average ticket price is $1500 and the cost per passenger is $200, each sold ticket generates $1,300 of the positive cash flow. Since $295,000 of the initial capital had been spent by November 14th, the following minimum number of passengers must sign up in order for Health Cruises to break even provided no more money is invested:

The spreadsheet shows that the new ship would be best utilized on the Tallinn-Helsinki run, where it replace the capacity of three older ships, the Regina Baltica, the Fantaasia and the Vana-Tallinn. The spreadsheet does not factor in the fixed costs associated with each boat, but it is a reasonable assumption that the fixed costs of the three boats that would be sold are going to be higher than the fixed costs associated with the one new boat. It is recommended, therefore to purchase the new ferry as the solver illustrates that the new ferry would deliver greater contribution margin to Tallink than the three older ferries that it would replace.

In terms of transportation costs only, the chartered vessel is cheaper. However, when we take into account cash flows and the value of money, the Baltimore route becomes advantageous. Assume we use the charter vessel. It should arrive on May 30th and HDT will be paid. However, if trucks are sent two at a time via Baltimore, the middle pair (#25 and #26) should be finished on about April 16th and arrive at Doha about May 8th, when they will be paid—in other words, 22 days earlier than if they arrived on May 30th on the chartered vessel. HDT pays 8% per year for its money so here is how to calculate the savings for truck #25 or #26:

= ($3,600,000 + $1,071,429) ÷ ($205 - $85) = $4,671,429 ÷ $120 = 38,929 Passengers