ACCT11059 ACCOUNTING, LEARNING & ONLINE COMMUNICATION
ASSIGNMENT STAGE 2
Danielle Bradley
CQUniversity
Personal Moodle Profile: Danielle Bradley
Personal Blog Link: Be Audit You Can Be
step 7: variable costs & contribution margins
Lyttenton Port of Christchurch (LPC) provide numerous services in the process of operating a port, many of which can be viewed on my blog post LPC initial findings.
The three services LPC provide which will be utilised for this step are:
- Navigation – includes pilotage, marine, harbor control, navigation aids and dredged channel.
- Berth hire – hire is on a 24hour basis from time of berthing a vessel
- Container door taping –security seal for shipping containers
I selected the above services as the first two I feel are an essential component of LPC’s operation. The third service, container door taping, I believe isn’t a necessary service provided however I was interested to find out how unessential services aided in the profitability of LPC.
After further research into these 3 services I discovered the price charged per service is often based on the GRT or gross registered tonnage of each vessel. Therefore for the services with a price based on GRT, I have chosen a vessel of 5000GRT in order to have a comparable price base. Consequently, the price per service as outlined on LPC’s website is as follows:
- Navigation = $0.63 per GRT = $3,150
- Berth hire = $0.163 per GRT = $815
- Container door taping per container = $130
The variable cost percentagevary greatly between the services I have chosen. Variable costs themselves are those costs which are dependent on and vary based on the level of output of production. However, LPC operate in the service industry and after much research I discovered the common division of fixed and variable costs differs quite significantly to production based firms. For instance, in a manufacturing firm labour is often considered a variable cost which rises as the volume of output is increased, whereas in a service based firm labour can be categorised as a fixed cost with staff employed under a secure wage. Thus, after consulting LPC’s website and gaining a wealth of information on the operating of ports from New Zealand’s transport department, I made an educated guesstimate for the percentage of variable costs associated with each service.
The variable cost percentage I have attributed to the three services are:
- Navigation = 50%
- Berth hire = 40%
- Container door taping = $90%
The variable cost of each service:
- Navigation = 50% x $3,150 = $1,575
- Berth hire = 40% x $815 = $326
- Container door taping = $90% x $130 = $117
Contribution margin = SP (sales price) – VC (variable cost)
- Navigation = $3150 - $1575 = $1,575
- Berth hire = $815 - $326 = $489
- Container door taping = $130 - $117 = $13
Navigation / Berth Hire / Container Door Taping
Sales Price / $3,150 / $815 / $130
Variable Cost / $1,575 / $326 / $117
Contribution Margin / $1,575 / $489 / $13
Contribution Margin Discussion
From my understanding, the contribution margin enables managers to determine how much a product/service contributes to covering fixed costs, and once such costs are paid, towards profit. The first noteworthy item to convey is that all three of LPC’s services have a contribution margin greater than zero thus positively contributing to LPC’s fixed costs and profit. Furthermore,as evident from above, the contribution margin differs significantly between the three services: navigation, berth hire and container door taping. Essentially, this significant difference is due to the sales cost of each service being vastly different from the other as well as the variable costs associated with each.For instance, LPC charge a considerable amount for navigation ($3,150) as it is a much more extensive service wherepilotage, marine, harbor control, navigation aids and dredged channel are inclusive in the price. On the opposite end of the spectrum is container door taping. This service is priced at a much lower rate ($130) and does not require such extensive activities to be undertaken. Thus, it is not difficult to identify why there is such a difference between contribution margins.
There are several motivesI believe for LPC providing various services with a range of contribution margins. Firstly, operating a port requires numerous activities to coincide with one another. One service cannot occur without another, such is the case for navigation and berth hire. You may then question why these services aren’t priced together instead of two separate services. The reasoning I believe is due to the various vessel sizes and length of stay each requires. LPC charge different prices based on the size of each vessel and although many of the services are compulsory, each does not require the same labour intensiveness as others. For instance it is an easier task to navigate and provide berth for a smallership of 5,000GRT than a larger vessel of 50,000GRT. Separating the cost allows for the customisation for each customer based on their vessel size, and their stay requirements.
That covers navigation and berthing hire but what about container door taping? I feel this is similar to not ‘putting all your eggs in one basket’ so to speak. This service, while possibly essential for some shipping containers due to the cargo they contain, allows LPC to diversify their services. The contribution margin for such a service is extremely low compared to that of the others however it would still contribute to the overall profitability of LPC. Container door taping is a quick and easy process which does not have many fixed costs and therefore is a good ‘add-on’ to increase revenue. When customers decide to purchase this additional service, they are generally not doing so for only one or even ten containers. It is most often used in excess of twenty containers depending on the cargo they contain (with the average container ship capable of holding 3,500 containers). The contribution margin goes from insignificant for the container door taping for one container, but turns into a game changer when used on a large scale. I conducted further research to see if said service was a common provision for other ports operating in the area. There is one other main competitor on New Zealand’s South Island, Port Otago. After perusing their services and associated prices I discovered they themselves do not provide container door taping. Knowing this provides further weight to LPC finding ways to diversify their operation and thus entice freight companies to utilise their services over another.
Therefore, in the case of LPC, it is not operationally possible to provide only one service with the highest contribution margin as many services complement each other and must be undertaken together. I believe other non-critical services are also provided with the aim to diversify their operation and generate further revenue.
Possible Constraints Discussion
Firms are faced with a multitude of constraints that can impact their decisions on what products/services to provide customers. For LPC, who operate in the service sector, I believe skilled labour would be their biggest resource constraint. Many of their services, such as navigation and berth directing, involves numerous activities that only those with expertise, skill and qualifications can conduct. As such, when LPC determine their shipping schedule which outlines the times and numbers of vessels able to move in and out of the port, they would need to consider the available employees qualified to undertake such tasks. The population size of Lyttelton and the surrounding areasis also relatively small and thus could affect future services depending on whether individuals are recruited into undergoing training and qualifications to continue LPC’s success into the future.
Another resource constraint which has the potential to impact LPC’s services is the availability, accessibility and cost of fuel. During my research of LPC and their operations, it became evident that LPC make extensive use of machines, tug boats and navigationalaids that are powered by petroleum and diesel products. This is also evident within the three services I have highlighted. The supply and demand of fuel is constantly fluctuating however the cost is ever increasing. Therefore when determining the services LPC provide, management would also need to consider the most fuel effective means to ensure any fuel shortages or drastic increases in price doesn’t affected their scheduled services. Currently, LPC have mechanisms in place to decrease the risk of fuel price rises through their use of fair value hedges.
Furthermore, LPC is not only impacted by resource constraints, but also by constraints from the market itself. LPC operate in the transport and freight industry where they themselves are essentially the go-between for national and international freight companies. Consequently, LPC is at the mercy of fluctuations that occur within this industry and the changing rules, regulations and international agreements that affect the import and export trade. If imports or exports were to significantly reduce in volume due to various market pressures such as economic instability or changes in shipping regulations, LPC would be bear the brunt of the burden themselves.
When determining the services LPC will provide, it is highly important to consider the above constraints. Now as I have already highlighted, navigation and berth hire are essential services LPC conducts for their operation and therefore they are a non-negotiable item when determining what services to provide their customers. Hence LPC must consider how often they are able to provide these services if the above potential constraints were to arise. For instance, if a skilled labour shortage occurred, LPC would need to consider how often they can provide each service based on the skilled staff currently employed. Container door taping however is not an essential service. Therefore, if faced with a labour shortage they could either terminate or reduce the offering of container door taping to ensure the critical services have more staff available, with potentially training said staff in the areas required to continue operations at the most efficient level. Hopefully LPC have forward thinking managers who are constantly recruiting and training to overcome any potential labour deficits but they must also put in place mechanisms to compensate if this were to arise. Similar can be said in regards to constraints from fuel accessibility and cost. The critical services of navigation and berth hire must be maintained. Therefore if the availability of fuel was to decrease, LPC would need to ensure any machinery and operating equipment are removed from services that are not vital to their operation. As listed above however, LPC do have one mechanism in place to assist with this particular constraint, in the form of fair value hedges. Furthermore, market constraints such as fluctuations in the transport industry have a huge impact on LPC. In this case I believe diversifying their service range to include items such as container door taping is extremely important. This allows for firms that are still importing and exporting to have further options not provided by LPC’s local competitors. To conclude, by providing services that enable the ease of freight transport, as well as diversification of the services available, will enable LPC to continue to overcome potential constraints to their operation.
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