Campus Package Delivery (CPD) provides transportation services in and around Paradise. Its profits have been declining, and management is planning to add a package express service that is expected to increase revenue by $305,000 per year. The total cost to lease the necessary package delivery vehicles from the local dealer is $25,000 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$762,000
Costs Vehicle leases 302,000 Labor 239,000 Utilities 30,000 Rent 65,000 Other costs 35,000 Manager's salary 117,000
Total costs$788,000
Operating profit (loss)$(26,000)
Prepare a report of the differential costs and revenues if the express service is added.
Should management start the express service?