Starfire Case Analysis

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Case Report: Starfire’s Dilemma CPA(C)11313279 闫虹羽 1. Case Introduction Starfire’s founder James has a negative attitude towards the proposal to add routes of its customer, FHP Technologies. James is reserved to enlarging capacity to suffice FHP’s propels by taking debts. However, Simmons insists that they should accept the proposal in some ways such as using independent contractors and squeezing capacity within current fleet, other than taking debts. Therefore, it is essential to determine whether the company should accept the new contract. 2. Financial Analysis • Scenario #1 Though the company has many choices to use its current capacity to suffice FHP’s need, the most practicable one (we will discuss other methods later in the capacity analysis) is to use the spare equipment for the new delivery routes and rent equipment in case a dry-van breaks down. In this way the company’s balance sheet will not change too much as it will not take debts to buy new equipment. However, suppose FHP requires two separate loads per week, the company may have to employ one more driver to drive the van, which will lead to an increase in variable labor cost. Although no conspicuous fixed cost is related to the operating activity, the company may increase its cost of Rental Equipment due to a shrink in available spare equipment. We further forecast that the rental rate will increase by 20%, assuming that there are five spare trucks in the last year. Thus, an additional fixed rental cost of $202,600 will incur. Moreover, maintenance fee will also increase since the frequent use of the truck. We assume that the maintenance fee approximately correlates with miles; therefore, we can use the per mile cost to calculate an additional fixed maintenance cost, which is around $1,530. Ultimately, the total incremental fixed cost for

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