er variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision: Cost Information Option A O
Cost Structures for Global Shippers Inc.
Management from Global Shippers Inc, an international shipping business, is in the process of assessing the choice between two different cost structures for the business. Option A has relatively higher variable costs per unit shipped but lower annual fixed costs, while Option B has the opposite—relatively lower variable costs in its cost structure but higher fixed costs. Assume that delivery selling prices per unit are constant. The table below contains critical information in making the decision:
|
Cost Information |
Option A |
Option B |
|
Delivery price (revenue) per shipment |
$100 |
$100 |
|
Variable cost per shipment delivered |
$85 |
$60 |
|
Contribution Margin per unit |
$15 |
$40 |
|
Fixed costs (annual) |
$1,200,000 |
$4,500,000 |
Management wants you to write a professional report, answering the following questions:
Question 1
Analyze and categorize various expenses into fixed cost, variable cost and initial investment
Question 2
Find the breakeven point and plot a CVP graph
Question 3
How many bricks need to be sold so as to earn a targeted income of Rs. 2 million per year?
Question 4
How do volumes affect the return on equity?
Question 5
What advice can be given to the owners?
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