ECON 137A University of California USA College Managerial Accounting Discussion
Question Description
Case Study with questions:
1. 10 points Assume Certified could service the contract with existing equipment. Use Exhibit 1 to
identify the relevant costs concerning the acceptance of FHP’s request to add two additional
loads per week. Which costs are not relevant? Why?
2. 10 points Calculate the contribution per mile and total annual contribution associated with
accepting FHP’s proposal. (Use 52 weeks per year in your calculations.)
3. 20 points After a closer examination of capacity, management believes an additional rig is
required to service the FHP account. Assume Certified’s management chooses to invest in one
additional truck and trailer that can serve the needs of FHP (at least initially). Assume the annual
incremental fixed costs associated with acquiring the additional equipment is $50,000. Further,
FHP would agree to pay $2.20 per mile if Certified would sign a five-year contract. What is the
annual number of miles required for Certified to break even, assuming the company adds one
truck and trailer? What is the expected annual increase in profitability from the FHP contract?
(Use 52 weeks per year in your calculations.)
4. 20 points Certified has business relationships with independent contractors, though Alan is
reluctant to use them. Another possibility for expanding capacity is to outsource the miles
requested by FHP. One of Certified’s most reliable independent contractors has quoted a rate of
$1.65 per mile. As with question 3, assume FHP would agree to pay $2.20 per mile if Certified
would sign a five-year contract. Further, assume Certified would incur incremental fixed costs of
$20,000 annually. These costs would include insurance, rental trailers, certain permits, salaries
and benefits of garage maintenance, and office salaries such as billing. How many annual miles
are required for Certified to break even if the miles are outsourced? What is the expected
annual increase in profitability from the FHP contract?
5. 40 points Prepare a recommendation to management. Use information from your answers to
questions 1–4 in your analysis. Clearly state and support your recommendation. Be thorough.
Consider both quantitative and qualitative factors. Be beefy. Use good form.
