Problem 1 - Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers.
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|
Customer Revenues
|
Customer Costs
|
| Marveline Burnett |
$300 |
$225 |
| J Jackson |
200 |
305 |
| Roger Jones |
80 |
75 |
| Paul Saas |
75 |
110 |
| Becky Stephan |
350 |
220 |
Question 1: Compute the operating income for each of the five customers.
Question 2: What options should Handy-Man Services consider in light of the customer-profitability results?
Question 3: What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?
Problem 2 - Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
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|
Proposal A
|
Proposal B
|
Proposal C
|
|
Initial investment in equipment
|
$90,000
|
$90,000
|
$90,000
|
|
Annual cash increase in operations:
|
|
|
|
|
Year 1
|
80,000
|
45,000
|
90,000
|
|
Year 2
|
10,000
|
45,000
|
0
|
|
Year 3
|
45,000
|
45,000
|
0
|
|
Salvage value
|
0
|
0
|
0
|
|
Estimated life
|
3 yrs
|
3 yrs
|
1 yr
|
The company uses straight-line depreciation for all capital assets.
Question 1: Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%.
Question 2: Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?