Analyze Auto Rental versus Reimbursement Policy: G & H Real Estate Agency requires all of its agents to travel throughout the entire area to list and sell property. The company has a reimbursement policy of $.25 per mile for all business-connected travel. The agents are responsible for all costs associated with the operation of their own automobiles. Last year, the average mileage claimed by an agent was 50,000 miles. G & H offices are open 300 days a year.

Jack Golden, the president, senses that some of the agents may have been claiming excess miles during the year. Golden is convinced that the annual mileage use would drop to 42,000 miles per year if the agents were not using their own cars. Therefore, he is considering providing automobiles to the agents.

Golden asked both International Car Rental and a local automobile dealer. Aron Motor, to present proposals. The proposals are described below.

Golden has asked your help in comparing the alternatives.

Required:

Calculate an annual before-tax cost to G & H for:

a. The current reimbursement practice.

b. The proposal of International Car Rental.

c. The proposal of Aron Motor.

Based on these data, which alternative would you recommend that Golden accept?

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International Car Rental's Proposal International presented a lease arrangement with the following requirements: 1. G & H would rent 20 automobiles for an entire year at $66 per week per automobile and $.14 per mile. 2. When one of the 20 automobiles is in for service, International would provide a replace- ment at $7 per day and $.20 per mile. International would absorb all repair and maintenance costs. Normally, an automobile would be out of service only one day at a time, and each automobile can be expected to be out of service 12 days per year. 3. Cost of insurance is included in the weekly rental rate. 4. G & H would be required to purchase the gasoline for the automobiles at an average cost of $1.50 per gallon. International estimates that G & H should expect to get 21 miles per gallon.. Aron Motor's Proposal Aron offered a purchase-buy-back arrangement with the following requirements: 1. G & H would buy 20 automobiles at $12,000 each. Aron would buy the automobiles back after one year at $7,000 each. 2. G & H would have to bring each automobile in once every two months for preventive maintenance and service. The cost to G & H for each visit would be $50. Aron would provide a loaner automobile at no additional cost. Aron would accept responsibility for any additional repair and maintenance charges. 3. G & H would have to purchase insurance at an annual cost of $200 for each automobile. 4. G & H would purchase one new set of tires each year at $125 per set. 5. G & H would be responsible for the purchase of gasoline at an average cost of $1.50 per gallon. The automobiles will average 28 miles per gallon.