Reinert Moving and Storage is a company dedicated to provide moving and storage services to both businesses and individuals. Allen Reinert founded it in 1962 and soon after that the company started growing at an incredible pace, especially after the de-regulation of the transportation industry in 1980. However, recently they have experienced a decrease in revenues from 1996 to1998.
Allen Reinert has met with its top executives, sales manager Heidi Jackson and controller Eric Bidodeau, to implement new strategies that would take this enterprise away from the red numbers.
Problem definition and assumption:
The problem basically consists on a lack of sales and growth continuation. The assumption is that by generating more sales, whilst reducing costs and not havingto resort to firing employees, the company would be in a better financial position.
So far, Heidi has come up with 2 possible solutions to the problem: increase the advertising budget and the company branching out to the international market to generate more sales. On the other hand, Eric has suggested installing a cost accounting system to reduce costs.
As we will see in thisreport, there were many variables that were computed to achieve the best results. First, we prepared an income statement sorting out the different expenses into Fixed and Variable expenses. After that, we calculated the revenue necessary for the company to pay all of its obligations, break even. Thirdly, we dismissed the suggestion of increasing the advertising fund because it proved not to be asefficient as originally thought. Next, the idea of having both suggestions for the next year was thrown out due to the apparent loss in profit this would bring out. Finally, this analysis will show that even though just entering the international market only accounts to 5.6% increase in revenue, it is the most profitable suggestion with a 0.02 profit ratio from the revenues. Also, costs weren’taffected as much as with other options. This is the CVP analysis to validate both proposals.
Variable and fixed expenses for 1998:
Fixed expenses | Variable expenses |
Insurance | $44,000 | Wages | $1,584,000 |
Advertising | $88,000 | Outside vehicle repair | $220,000 |
Equipment rental | $422,000 | Fuel | $352,000 |
Salaries | $821,000 | Sales commissions | $102,000 |Internal Maintenance | $293,000 | Tires, oil, lube | $20,500 |
Depreciation | $205,000 | Utilities | $16,700 |
| | Packing materials | $557,000 |
| | Cargo loss claims | $234,000 |
| | Fuel taxes and tariffs | $132,000 |
| | Bad debt | $193,000 |
Totals | $1,873,000 | Totals | $3,411,200 |
Fixed cost ratio | =1,873,000 / 5,284,200 = 38% | Variable cost ratio | =3,411,200 /5,284,200 = 62% |
Variable costing income statement:
| 1998 | |
Total revenue | | $5,493,000 |
Less Variable COGS, Selling and Admn. costs | | |
Wages | ($1,584,000) | |
Outside vehicle repair | ($220,000) | |
Fuel | ($352,000) | |
Sales commissions | ($102,000) | |
Tires, oil, lube | ($20,500) | |
Utilities | ($16,700) | |
Packing materials | ($557,000) | |Cargo loss claims | ($234,000) | |
Fuel taxes and tariffs | ($132,000) | |
Bad debt | ($193,000) | ($3,411,200) |
Contribution Margin | | $2,081,800 |
Less Fixed manufacturing, selling and admn. costs | | |
Insurance | ($44,000) | |
Advertising | ($88,000) | |
Equipment rental | ($422,000) | |
Salaries | ($821,000) | |
Internal maintenance | ($293,000) | |
Depreciation |($205,000) | ($1,873,000) |
Gross income | | $208,800 |
In order for the company to break-even with the fixed and variable costs can be computed in the following way:
Fixed expenses / Cont. margin | Revenue needed to break-even |
$1,873,000 / 0.38 | $4,942,064.08 |
As it is, the current revenue is more than half a million dollars more than the break-even point....