Sea Line is a massive cargo ship company that contracts with larger, well-known shippers to provide container shipping by sea to any deep water port in the world. Sea Line owns 50 ships, and currently has contracts for 41 of those ships. The other shippers pay Sea Line $2,500,000 per year to provide shipping services for their customers' containers. Sea Line is considering a new contract where they would provide 5 ships to a new company for $2,250,000 per year. Each Sea Line ship incurs yearly costs of $1,100,000 for labor, $300,000 for fuel, $1,000,000 in fixed overhead, and $500,000 in variable overhead.
What would be the differential gain or loss on this new contract?
A) A differential loss of $3,250,000.
B) A differential loss of $1,250,000.
C) A differential gain of $1,750,000.
D) A differential gain of $4,250,000.
E) Cannot be determined from the information provided.

Question

Quizplus · Accepted Answer

The fixed cost allocation is irrelevant to this decision. The company has unused capacity to fill the contract.
The marginal income per ship is:
$2,250,000 Revenue - $1,100,000 labor - $300,000 fuel - $500,000 variable overhead
= $350,000
Net differential gain: $350,000 × 5 ships = $1,750,000.

Sea Line Is a Massive Cargo Ship Company That Contracts