CASE STUDY (1)

Company A, a local car service center received an offer from one of the clients offering the company a one-year contract for additional work. The client requires a discount of 10% to be allowed on the total invoice value. Given the following information:

1- Additional required capital investments will be:

Equipment $10,000

Computers and Software $15,000

The Equipment will not be usable for any other contract. The Computers and Software may be used on other work after the end of this particular contract.

2- Additional workers will be required. Three full-time skilled mechanics earning $10 per hour will each work 39 hours per week on the new contract. They are each allowed 6 weeks per year paid holidays and 2 weeks paid training. Workers efficiency is 95% measured as the ratio of sold hours/hours attended. Training time and holiday time are charged to direct costs of the department. For each worker the new contract will leave some unsold hours available for any other jobs coming into the car service center. One full-time car cleaner will be required earning $12,000 per annum.

3- The client claimed that the likely increase in sales volume resulting from the new contract could be 4,750 hours charged at a rate of $20.00 per hour before discount. In addition, the increase in sales of car parts is estimated on the basis of $50.00 per hour with an average gross profit of 10% before discount. The increase in paint sales is calculated on the basis of $4.00 per hour with an average gross profit of 30% before discount.

4- Additional annual overheads will be as follows: Variable costs 5,000 Fixed costs 6,000 5 Depreciation is calculated on a straight-line basis as follows: Computers and Software 25% You were hired as a consultant to provide your opinion on the acceptability of the clients proposal.

Required: Write a memo 3 pages max. including all supporting calculations to Company A: (a) Evaluating the financial aspects of the proposal; and (b) Highlighting briefly other considerations relevant to the decision-making process.