Variable Cost and Large Vessel

Topics: Variable cost, Costs, Contribution margin Pages: 5 (1045 words) Published: December 4, 2014
CASE STUDY
Tashtego

Advanced Topics in Management Accounting and Control

The purpose of this paper is to analyze the economic situation of the company Macedonian Shipping and give a recommendation whether the company should use the motor vessel Tashtego as a freight tender beween Dar-es-Salaam and Zanzibar in East Africa or as a tapioca ship between Balik Papan and Singapore in the East Indies. Fundamental to all these considerations are measurement issues. Financial measures, in particular, cost measures, are needed to evaluate alternate strategies on whether to introduce a new product or service line, to determine the appropriate sale price and the consequent market position for the firm’s product.

Question 1)
“Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs. To compute profit contribution that can be earned by carrying 1 ton of tapioca from Balik Papan to Singapore, dock to dock, and 1 ton of general merchandise goods from Singapore to Balik Papan only cargo costs were considered as relevant. Cargo costs of both ports have to be considered as each freight has to be reloaded at one port and unloaded at the other.

Therefore, profit contribution of carrying 1 ton of tapioca from Balik and Singapore is Expected revenue $5.10 less freight cost 1,43 = $ 3,67
and from Singapore to Balik:
Expected Revenue $2.70 less freight cost 1,43 = 1,27.

1. Contribution/t dock to dock | | | |
| | | |
| BP-SP Tapioca |   | SP-BP M. goods |
| |   | |
Revenue/t | | 5,10 | 2,70 |
| |   | |
Lighterage BP | 0,25 |   | |
Stevedoring BP | 0,56 |   | |
Cranage BP | 0,00 |   | |
Lighterage SP | 0,16 |   | |
Stevedoring SP | 0,32 |   | |
Cranage SP | 0,14 |   | |
Cargo costs/t | | 1,43 | 1,43 |
Contribution/t | | 3,67 | 1,27 |

There is no cranage charge in Balik Papan because the freight in this port is manhandled.

Question 2)
The total contribution that can be earned on one round trip between Singapore and Balik Papan is the difference between the total revenue and the total cargo costs. For the total revenues for each vessel the freight rates for Tapioca and for manufactured goods are multiplied with the amount of tons that are moved from one harbour to the other.

2. Total contribution for a round trip |   |   | | |
| TASHTEGO | LARGE VESSEL |
| BP-SP Tapioca | SP-BP goods | BP-SP Tapioca | SP-BP goods | | | | | |
| | | | |
Capacity (t) | 3.950,00 | 3.150,00 | 6.850,00 | 3.150,00 |
| | | | |
freight rate/t | 5,10 | 2,70 | 5,10 | 2,70 |
Revenue | 20.145,00 | 8.505,00 | 34.935,00 | 8.505,00 |
| | | | |
| | | | |
Total Revenue | 28.650,00 | 43.440,00 |
Total Cargo costs | 10.153,00 | 14.300,00 |
Total contribution | 18.497,00 | 29.140,00 |
As cargo costs vary with the freight moved they are calculated as a product of Cargo costs per ton, as stated above, and the capacity for each of the vessels, i.e. for Tashtego 1,43*3950 + 1,43*3150 = 10.153,00 and for the large vessel 1,43*6850 + 1,43*3150 = 14.300,00.

Question 3)
Incremental cost is the cost associated with increasing production by one unit, in this case sending Tashtego on a round trip. It represents the added costs that would not exist if the round trip was not made. The turnaround at Balik Papan takes 3 days for one of the large vessels and 2,5 days for Tashtego. The turnaround time in Singapore is 1 day for both vessels. Days in port |   |   |

  | Tashtego | Large Vessel |
BP | 2,5 | 3 |
Singapore | 1 | 1 |

Trip costs:
To get the portage dues we calculate the portage dues per day in port per ton burden (0,14 in BP and 0,20 in SP) times 4500 (for the Tashtego) respectively 12500 (for large vessels) and times the according days in port. Tashtego: Portage (4500*0.14*2.5 = 1575) + (4500*0.2*1 = 900) = $ 2475 Large vessel: Portage (12500*0.14*3=5250) + (12500*0.2*1*2=5000) = $ 10250.

Costs for Lighthouse at both ports has to be...
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