Campus Package Delivery (CPD) provides delivery services in and around Paradise. Its profits have been declining, and management is planning to add an express service that is expected to increase revenue by $100,000 per year. The total cost to lease the necessary additional package delivery vehicles from the local dealer is $7,500 per year. The present manager will continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.
Operating profit means the all the expenses will be deducted from the revenue from the service. The remaining amount is known for operating profit. This will be related to the operations.
Answer and Explanation:
|CAMPUS PACKAGE DELIVERY|
|Annual Income Statement|
|Before expansion||With express service||Differential|
|Operating profit (loss)||$(24,000)||$2,900||$26,900|
|The decision to expand and offer the express service results in differential profits of $26,900, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The manager's salary did not change, so it was not included.|
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from Accounting 201: Intermediate Accounting IChapter 5 / Lesson 6