Aardvark Delivery Services (ADS) is involved in providing three different types of delivery services these are letter delivery, express parcel delivery and regular parcel delivery. The inability of the management to earn positive contribution from the business operation is matter of concern. As can be seen that the actual performance of 2xx5 has increased the concerns of the management further with net deficiency increase to $2,807,000.
Profitability analysis:
In order to conduct a high level profitability analysis firstly, it is important to correctly apportion the costs associated with different services ADS. The following statement below shows the actual costs and surplus or deficiency from different services of ADS (Kaplan & Atkinson, 2015).
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
37,800.00 |
2,310.00 |
26,880.00 |
66,990.00 |
|
Rates |
0.48 |
2.10 |
1.05 |
|
|
(A): Revenue |
18,144.00 |
4,851.00 |
28,224.00 |
51,219.00 |
|
Expenses: |
||||
|
Delivery |
7,508.00 |
998.00 |
9,240.00 |
17,746.00 |
|
Administration |
3,276.00 |
259.00 |
3,017.00 |
6,552.00 |
|
Promotion |
1,155.00 |
578.00 |
998.00 |
2,731.00 |
|
Sorting expenses |
5,035.76 |
7,004.46 |
14,955.79 |
26,996.00 |
|
(B): Total expenses |
16,974.76 |
8,839.46 |
28,210.79 |
54,025.00 |
|
Surplus / (deficit) (A-B) |
1,169.24 |
(3,988.46) |
13.21 |
(2,806.00) |
Part 2:
It is clear from the above calculation that the biggest contributing factor to the overall deficiency of ADS is the inability of the organization to correctly price its express delivery services. In fact both letters and regular delivery services are running profitably whereas the loss from express delivery services is significantly high to contribute to the overall deficiency of ADS (Otley, 2016).
|
Service departments |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
|
Maintenance |
1,310,400.00 |
1,071,275.91 |
86,084.67 |
153,039.42 |
|
Janitorial |
2,620,800.00 |
683,686.96 |
940,069.57 |
997,043.48 |
|
1,754,962.87 |
1,026,154.24 |
1,150,082.89 |
|
Service departments |
Maintenance |
Janitorial |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
|
Maintenance |
1,310,400.00 |
18,854.68 |
1,055,861.87 |
84,846.04 |
150,837.41 |
|
|
Janitorial |
2,620,800.00 |
256,941.18 |
616,658.82 |
847,905.88 |
899,294.12 |
|
|
Maintenance |
210,054.10 |
16,879.35 |
30,007.73 |
|||
|
Janitorial |
4,918.61 |
6,763.09 |
7,172.97 |
|||
|
Total administrative costs |
1,887,493.41 |
956,394.36 |
1,087,312.23 |
Step method provides the more reasonable allocation of service department costs to the production departments. It is better method as the allocation of service departments costs have been apportioned more accurately in production departments.
Administration employee hours and office administration costs represent better cost behavior as opposed to documents used and office administration costs as the employees are responsible for assigning their work hours in three operating departments.
|
Total administration costs |
3,931,200.00 |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
Fixed portion |
2,358,720.00 |
786,240.00 |
786,240.00 |
786,240.00 |
|
Variable |
1,572,480.00 |
484,801.01 |
391,233.02 |
696,445.97 |
|
1,271,041.01 |
1,177,473.02 |
1,482,685.97 |
Change in allocation certainly affects the cost of different services thus, it would be possible for ADS to correctly analyze and take important decision to improve the operating performance of ADS in the future.
|
Total sorting costs |
|||
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
Pre short |
1,903.76 |
232.68 |
2,707.56 |
|
Sort letter |
1,362.00 |
||
|
Seprate express and regular parcel delivery |
511.78 |
5,955.22 |
|
|
Regular parcel sort |
5,113.00 |
||
|
Sort express parcels |
3,722.00 |
||
|
Expedite parcel sort |
2,538.00 |
||
|
Distribute to mail carriers |
1,770.00 |
1,180.00 |
|
|
Total sorting costs |
5,035.76 |
7,004.46 |
14,955.79 |
As can be seen that the sorting costs to be allocated top different services are quite different as compared to the operating statement of 2xx5 prepared by ADS as a result the operating performance of ADS can be redrafted below:
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
37,800.00 |
2,310.00 |
26,880.00 |
66,990.00 |
|
Rates |
0.48 |
2.10 |
1.05 |
|
|
(A): Revenue |
18,144.00 |
4,851.00 |
28,224.00 |
51,219.00 |
|
Expenses: |
||||
|
Delivery |
7,508.00 |
998.00 |
9,240.00 |
17,746.00 |
|
Administration |
3,276.00 |
259.00 |
3,017.00 |
6,552.00 |
|
Promotion |
1,155.00 |
578.00 |
998.00 |
2,731.00 |
|
Sorting expenses |
5,035.76 |
7,004.46 |
14,955.79 |
26,996.00 |
|
(B): Total expenses |
16,974.76 |
8,839.46 |
28,210.79 |
54,025.00 |
|
Surplus / (deficit) (A-B) |
1,169.24 |
(3,988.46) |
13.21 |
(2,806.00) |
Conclusion:
The above redrafted operating statement of ADS clearly shows that the express delivery services is the biggest contributor to the overall deficiency in operating performance of ADS. Thus, immediate changes to express delivery pricing must be made to improve the operating performance of ADS.
(All amounts are in $’000)
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
37,800.00 |
2,310.00 |
26,880.00 |
66,990.00 |
|
Rates |
0.48 |
2.10 |
1.05 |
|
|
(A): Revenue |
18,144.00 |
4,851.00 |
28,224.00 |
51,219.00 |
|
Expenses: |
||||
|
Delivery |
7,508.00 |
998.00 |
9,240.00 |
17,746.00 |
|
Administration |
3,276.00 |
259.00 |
3,017.00 |
6,552.00 |
|
Promotion |
1,155.00 |
578.00 |
998.00 |
2,731.00 |
|
Sorting expenses |
5,035.76 |
7,004.46 |
14,955.79 |
26,996.00 |
|
(B): Total expenses |
16,974.76 |
8,839.46 |
28,210.79 |
54,025.00 |
|
Surplus / (deficit) (A-B) |
1,169.24 |
(3,988.46) |
13.21 |
(2,806.00) |
|
Total sorting costs |
|||
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
Pre short |
1,903.76 |
232.68 |
2,707.56 |
|
Sort letter |
1,362.00 |
||
|
Seprate express and regular parcel delivery |
511.78 |
5,955.22 |
|
|
Regular parcel sort |
5,113.00 |
||
|
Sort express parcels |
3,722.00 |
||
|
Expedite parcel sort |
2,538.00 |
||
|
Distribute to mail carriers |
1,770.00 |
1,180.00 |
|
|
5,035.76 |
7,004.46 |
14,955.79 |
It is clear from the above operating statement that out of three services, i.e. letters, express delivery and regular delivery of Aardvark Delivery Service express delivery is the only service that is running in huge loss whereas both letters and regular delivery are running profitably. However, the profit from regular delivery services is also very less with mere profit of $13,210. The operating profit from letter services is $1,169,240 as can be seen in the above (Renz, 2016).
The operating profitability statement by using letter price of $0.48 per letter and Express delivery prices of $2.75 per delivery.
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
|
Volume |
40,000.00 |
2,264.00 |
26,880.00 |
|
Rates |
0.49 |
2.75 |
1.05 |
|
(A): Revenue |
19,600.00 |
6,226.00 |
28,224.00 |
|
Expenses: |
|||
|
Delivery |
7,944.97 |
998.98 |
9,240.00 |
|
Adminstration |
3,466.67 |
253.82 |
3,017.00 |
|
Promotion |
1,222.22 |
566.44 |
998.00 |
|
Sorting expenses |
5,328.84 |
6,864.37 |
14,955.79 |
|
(B): Total expenses |
17,962.70 |
8,683.61 |
28,210.79 |
|
Surplus / (deficit) (A-B) |
1,637.30 |
(2,457.61) |
13.21 |
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
40,000.00 |
2,264.00 |
26,880.00 |
69,144.00 |
|
Rates |
0.48 |
2.75 |
1.05 |
|
|
(A): Revenue |
19,200.00 |
6,226.00 |
28,224.00 |
53,650.00 |
|
Expenses: |
||||
|
Delivery |
7,944.97 |
998.98 |
9,240.00 |
18,183.95 |
|
Administration |
3,466.67 |
253.82 |
3,017.00 |
6,737.49 |
|
Promotion |
1,222.22 |
566.44 |
998.00 |
2,786.66 |
|
Sorting expenses |
5,328.84 |
6,864.37 |
14,955.79 |
27,149.00 |
|
(B): Total expenses |
17,962.70 |
8,683.61 |
28,210.79 |
54,857.10 |
|
Surplus / (deficit) (A-B) |
1,237.30 |
(2,457.61) |
13.21 |
(1,207.10) |
As per the projection the organization will still not be able to break even as the operation revenue from express delivery is still significantly less than the costs of providing express delivery services. However, with increase in price in express delivery the loss from express delivery services is expected to decrease significantly in 2xx6 as the net loss from express delivery services is expected to reduce to $2,457,610 compared to $3,988,460 a year before.
The business must increase the price of express delivery as the proposed price of $2.75 is still not enough to earn positive contribution from express delivery services. In fact ADS is still expected to have deficiency from its operations with net deficiency of $1,207,100 thus, ADS should increase its price for express delivery service further to earn net surplus from business (Messner, 2016).
The express delivery price shall be increased by $1.09 to earn positive contribution from express delivery services and improve the surplus. If the increase in express delivery prices does not affect the demand of express delivery services then the operating outcome will be as following:
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
40,000.00 |
2,264.00 |
26,880.00 |
69,144.00 |
|
Rates |
0.48 |
3.84 |
1.05 |
|
|
(A): Revenue |
19,200.00 |
8,693.76 |
28,224.00 |
53,650.00 |
|
Expenses: |
||||
|
Delivery |
7,944.97 |
998.98 |
9,240.00 |
18,183.95 |
|
Administration |
3,466.67 |
253.82 |
3,017.00 |
6,737.49 |
|
Promotion |
1,222.22 |
566.44 |
998.00 |
2,786.66 |
|
Sorting expenses |
5,328.84 |
6,864.37 |
14,955.79 |
27,149.00 |
|
(B): Total expenses |
17,962.70 |
8,683.61 |
28,210.79 |
54,857.10 |
|
Surplus / (deficit) (A-B) |
1,237.30 |
10.15 |
13.21 |
1,260.66 |
The operating profitability statement by using letter price of $0.48 per letter and Express delivery prices of $2.75 per delivery.
However, even if the increase in express delivery prices results proportional decline in demand then the operating surplus or deficiency would be as following:
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
40,000.00 |
1,360.00 |
26,880.00 |
68,240.00 |
|
Rates |
0.48 |
3.84 |
1.05 |
|
|
(A): Revenue |
19,200.00 |
5,222.40 |
28,224.00 |
52,646.40 |
|
Expenses: |
||||
|
Delivery |
7,944.97 |
599.39 |
9,240.00 |
17,784.36 |
|
Administration |
3,466.67 |
152.29 |
3,017.00 |
6,635.96 |
|
Promotion |
1,222.22 |
339.86 |
998.00 |
2,560.09 |
|
Sorting expenses |
5,328.84 |
4,118.62 |
14,955.79 |
24,403.25 |
|
(B): Total expenses |
17,962.70 |
5,210.17 |
28,210.79 |
51,383.66 |
|
Surplus / (deficit) (A-B) |
1,237.30 |
12.23 |
13.21 |
1,262.74 |
Thus, even if the demand for express delivery services declines significantly and proportionately with the increase in pricing ADS will be in better position to earn surplus income over expenditures in the future.
ADS should increase its pricing for express delivery services to improve its performance even if that means reduction in demand for express delivery services. The operating statement with decline in demand is provided below to understand the expected performance of ADS with the increase in express delivery prices.
The operating profitability statement by using letter price of $0.49 per letter and Express delivery prices of $3.84 per delivery.
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
40,000.00 |
1,360.00 |
26,880.00 |
68,240.00 |
|
Rates |
0.49 |
3.84 |
1.05 |
|
|
(A): Revenue |
19,600.00 |
5,222.40 |
28,224.00 |
53,046.40 |
|
Expenses: |
||||
|
Delivery |
7,944.97 |
599.39 |
9,240.00 |
17,784.36 |
|
Administration |
3,466.67 |
152.29 |
3,017.00 |
6,635.96 |
|
Promotion |
1,222.22 |
339.86 |
998.00 |
2,560.09 |
|
Sorting expenses |
5,328.84 |
4,118.62 |
14,955.79 |
24,403.25 |
|
(B): Total expenses |
17,962.70 |
5,210.17 |
28,210.79 |
51,383.66 |
|
Surplus / (deficit) (A-B) |
1,637.30 |
12.23 |
13.21 |
1,662.74 |
|
Particulars |
Letters |
Express delivery parcels |
Regular delivery parcels |
Total |
|
Volume |
40,000.00 |
1,360.00 |
26,880.00 |
68,240.00 |
|
Rates |
0.48 |
3.84 |
1.05 |
|
|
(A): Revenue |
19,200.00 |
5,222.40 |
28,224.00 |
52,646.40 |
|
Expenses: |
||||
|
Delivery |
7,944.97 |
599.39 |
9,240.00 |
17,784.36 |
|
Administration |
3,466.67 |
152.29 |
3,017.00 |
6,635.96 |
|
Promotion |
1,222.22 |
339.86 |
998.00 |
2,560.09 |
|
Sorting expenses |
5,328.84 |
4,118.62 |
14,955.79 |
24,403.25 |
|
(B): Total expenses |
17,962.70 |
5,210.17 |
28,210.79 |
51,383.66 |
|
Surplus / (deficit) (A-B) |
1,237.30 |
12.23 |
13.21 |
1,262.74 |
References:
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Messner, M. (2016). Does industry matter? How industry context shapes management accounting practice. Management Accounting Research, 31, 103-111.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.
Renz, D. O. (2016). The Jossey-Bass handbook of nonprofit leadership and management. John Wiley & Sons.
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