Advanced: Decision on whether to subcontract an appliance repair service or do own maintenance A company producing and selling a range of consumer durable appliances has its after-sales service work done by local approved sub¬ contractors.

The company is now considering carrying out all or some of the work itself and it has chosen one area in which to experiment with the new routine.

Some of the appliances are so large and bulky that repair/service work can only be done at the customers’ homes. Others are small enough for sub-contractors to take them back to their local repair workshops, repair them, and re-deliver them to the customer. If the company does its own after¬ sales service, it proposes that customers would bring these smaller items for repair to a local company service centre which would be located and organized to deal with visitors.

There is a list price to customers for the labour content of any work done and for materials used. However, the majority of the after-sales service work is done under an annual maintenance contract taken out by customers on purchasing the product; this covers the labour content of any service work to be done, but customers pay for materials used.

Any labour or materials needed in the first six months are provided to the customer free of charge under the company’s product guarantee and sub¬ contractors are allowed by the company a fixed sum of3.5% ofthe selling price for each appliance to cover this work. These sums allowed have proved closely in line with the work needed over the past few years. The price structure is:

2. Set up a local service centre to act only as a base for its own employees who would only service appliances at customers’ homes.
Servicing of small appliances would continue to be done under sub-contract.
3. Set up a local combined service centre plus base for all work. No work would be sub-contracted.
If the company were to do service work, annual fixed costs are budgeted to be:

You are required

(a) to recommend which of the three options the company should adopt from a financial view¬ point; (18 marks)

(b) in relation to the data provided in order to make the recommendation required in

(a) above, to comment critically in respect of non-financial features that might favourably or adversely affect the customer.

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For materials: Price to sub- contractor: Price to customer: Company cost plus 10% Sub-contractor's price plus 25% For labour: Price to sub-contractor: Work done under maintenance contract: 90% of list price Ad hoc work (i.e. work NOT done under maintenance contract): 85% of list price Records show that 60% by value of the work has to be carried out at customers' homes, whilst the remainder can be done anywhere appropriate. The annual income that the company currently receives from sub-contractors for the area in which the experiment is to take place is: