Relevant Cost Analysis: Decision Making Pack-and-Go, a new competitor to FedEx andUPS, does intra-city package deliveries in seven major metropolitan areas. The performance ofPack-and-Go is measured by management as (1) delivery time (relative to budgeted delivery time),(2) on-time delivery rates (defined as agreed-upon delivery date/time plus or minus a specified cushion), and (3) percentage of lost or damaged deliveries. In response to competitive pressures, Packand-Go is evaluating an investment in new technology that would improve customer service anddelivery quality, particularly in terms of items 2 and 3 above. The annual cost of the new technology,for each of the seven metropolitan areas serviced by Pack-and-Go, is expected to be $80,000. Youhave gathered the following information regarding delivery performance under both existing operations and after implementing the new technology:[LO 17-5]Decision AlternativeItem Current SystemAfter ImplementingNew TechnologyOn-time delivery rate 80% 95%Variable cost per package lost or damaged $ 30 $ 30Allocated fixed cost per package lost or damaged $ 10 $ 10Annual no. of packages lost or damaged 300 100Based on a recent marketing study commissioned by Pack-and-Go, the company estimates thateach percentage point increase in the on-time performance rate would lead to an annual revenueincrease of $10,000. The average contribution margin ratio for packages delivered by Pack-and-Gois estimated as 40%.Required1. From a financial perspective, should Pack-and-Go invest in the new technology? That is, what would bethe estimated net change in annual operating profit (to the nearest whole dollar) if the company makesthe proposed investment?2. Based on the data collected by Pack-and-Go, the company is fairly confident about the reduction in costsassociated with lost or damaged packages. However, because of uncertainties in terms of pricing in themarkets in which Pack-and-Go operates, it is less sure about the predicted increase in revenues associated with the implementation of the new technology. What is the breakeven increase in annual revenue(to the nearest whole dollar) that would justify the investment in the new technology?3. What other factors are likely relevant to the present investment decision facing Pack-and-Go?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Relevant Cost Analysis: Decision Making Pack-and-Go, a new competitor to FedEx and
UPS, does intra-city package deliveries in seven major metropolitan areas. The performance of
Pack-and-Go is measured by management as (1) delivery time (relative to budgeted delivery time),
(2) on-time delivery rates (defined as agreed-upon delivery date/time plus or minus a specified cushion), and (3) percentage of lost or damaged deliveries. In response to competitive pressures, Packand-Go is evaluating an investment in new technology that would improve customer service and
delivery quality, particularly in terms of items 2 and 3 above. The annual cost of the new technology,
for each of the seven metropolitan areas serviced by Pack-and-Go, is expected to be $80,000. You
have gathered the following information regarding delivery performance under both existing operations and after implementing the new technology:
[LO 17-5]
Decision Alternative
Item Current System
After Implementing
New Technology
On-time delivery rate 80% 95%
Variable cost per package lost or damaged $ 30 $ 30
Allocated fixed cost per package lost or damaged $ 10 $ 10
Annual no. of packages lost or damaged 300 100
Based on a recent marketing study commissioned by Pack-and-Go, the company estimates that
each percentage point increase in the on-time performance rate would lead to an annual revenue
increase of $10,000. The average contribution margin ratio for packages delivered by Pack-and-Go
is estimated as 40%.
Required
1. From a financial perspective, should Pack-and-Go invest in the new technology? That is, what would be
the estimated net change in annual operating profit (to the nearest whole dollar) if the company makes
the proposed investment?
2. Based on the data collected by Pack-and-Go, the company is fairly confident about the reduction in costs
associated with lost or damaged packages. However, because of uncertainties in terms of pricing in the
markets in which Pack-and-Go operates, it is less sure about the predicted increase in revenues associated with the implementation of the new technology. What is the breakeven increase in annual revenue
(to the nearest whole dollar) that would justify the investment in the new technology?
3. What other factors are likely relevant to the present investment decision facing Pack-and-Go?
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