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.
CAMPUS PACKAGE DELIVERY
Annual Income Statement before Expansion
Sales revenue ........... $ 304,000
Costs Vehicle leases ........... 120,000
Labor ............... 96,000
Utilities ............... 16,000
Rent ................. 32,000
Other costs ............. 16,000
Manager's salary .......... 48,000
Total costs .............. $ 328,000
Operating profit (loss) ........ $ (24,000)
Required :
a. Prepare a report of the differential costs and revenues if the express service is added.
b. Should management start the express service?
c. Are there factors beyond the differential costs and revenues that management should consider?