Over-land Trucking and Freight has a long-established and mutually beneficial business relationship with a major international automotive parts company, FHP Technologies. Management at FHP has approached Over-land with a request to provide additional routes that are important to the efficiency of its supply chain. Over-land’s management wishes to nurture the business relationship with FHP but is concerned about the available capacity to service the new routes, potential risks, and profitability associated with FHP’s request.
Financial Analysis, thinking strategy, and strategic issues
Financial analysis of three independent options are:
a. Serving FHP with existing capacity
b. Serving FHP by investing one additional truck and one trailer increases $50,000 in fixed costs annually.
c. FHP prepares to pay $2.20 per mile (including FSC and miscellaneous fees) if 5 years contract is signed.
In order to view capacity, defining and managing capacity is the right approach.
Advantages and disadvantages are considered for all options.
Marginal cost-benefit approach with sensitivity analysis
I undertake marginal cost-benefit analysis by considering the added revenue and deducting from it added costs (variable costs and fixed) for all three options and compare the most beneficial one.
Since FHP pays Over-land fixed revenue inclusive of FSC charges, Over-land has to pay the extra FSC in case it rises and doesn’t cover by the amount FHP pays. So, I include 10% ± in FSC rate and ascertain its effect on Net Contribution.
Options to gain business opportunity with FHP
Option 1 Expand capacity by squeezing capacity out of existing trucks
Financially more viable Faster depreciation in long run
Risk doesn’t increase Fuel price vitality
Increase profitability Over exposed to single client
No new debt Service level deteriorate in long...