Preston Concrete is a major supplier of concrete to residential and commercial b

Question

Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's general pricing policy is to set prices at $113 per cubic yard. Deliveries for 2017 were 420,000 cubic yards. Costs per cubic yard were:

$1,856,400 of the estimated total yard operation costs were fixed, and all of the administrative costs were fixed. In addition to the costs above, estimated fixed delivery costs were $180,000 for the year, and estimated variable delivery costs were $6.50 per mile and $40.00 per truck hour. The rate per mile reflects the fact that more miles result in more gas, oil, and maintenance. The rate per truck hour reflects the fact that trucks that are waiting at a jobsite are kept running (so the concrete mix won't solidify), and drivers continue to get paid during that time.

Near the end of 2017, Fairview Construction Company asked for a delivery of 5,200 cubic yards of concrete but was unwilling to pay the regular price; it was only willing to pay $84 per cubic yard. Preston estimated that the job would require 6,600 miles of driving and 210 truck hours. The housing market in the Pacific Northwest had slowed during recent months, leaving Preston with enough capacity to fill the order, but its sales manager was reluctant to commit to such a reduced price.

REQUIRED

If Preston accepted the offer, what would the profit or loss be (enter a loss as a negative number)?

Material costs $63.50   Yard operation costs $13.00   Administrative costs $4.50  

Explanation / Answer

Incremental analysis :

If preston accepted the offer than profit will be $10684

Incremental revenue (5200*84) 436800 Incremental cost Material (5200*63.50) 330200 Yard operation costs (420000*13-1856400/420000)*5200 44616 Variable delivery cost (6600*6.5+210*40) 51300 Total incremental cost 426116 Incremental profit (loss) 10684

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