Case Study for Managerial Accounting
ABC company is currently providing car benefits to its employees. The company outrightly purchases the cars as employee benefit. In addition, the company also pays for the fleet management services and car insurances. However, the repair and maintenance will be shouldered by the employees. The entitlement of each position level is below. Each employee can select a car unit that is equal or greater than their entitled benefit. If they opt to get a car greater than their entitlement, they will need to pay the excess amount to the company. Position Entitlement Level A 800,000 Level B 900,000 Level C 1,000,000 Level D 1,500,000 The annual spend of the company in terms of Insurance and Fleet Management is detailed in below table. Fleet Position Insurance Management Level A 16,000 6,000 Level B 18,000 6,000 Level C 20,000 6,000 Level D 25,000 6,000 At the end of year5, if the employee is still with the company, the employee can own the car by paying 5% of their entitlement to the company. The company will then transfer the car ownership/title to the employee.If the employee resigns earlier than year5, there is an undertaking signed by the employee that he/she will need to pay to the company the remaining amount of the car based on his/her entitlement. The company would like to explore if they can consider operational leasing or financial loan in order to avoid upfront payments from outright purchasing of cars for the company. With this goal, the company collected quotations for both the operational and financial leasing.Operational Lease: The operational leasing company provided the following quotation, relative to the entitlement of each positions: Position Vehicle Price (1-60 months) Level A 800,000 25,762 Level B 900,000 28,728 Level C 1,000,000 31,110 Level D 1,500,000 41,540 The monthly payment already includes repair and maintenance, fleet management and insurance cost. At the end of year 5, the car assignee will have the option to buy the car at 20% residual value. If the leasing will be pre-terminated, the company will have to pay 60% of the remaining leasing period. Financial Loan: The procurement manager approached a bank to consider car loan for the employees. In this option, the company will back-up the employees to get a car unit through bank loan. While the employee is with the company, the company will pay the monthly amortizations to the bank. But once the employee resigns, the employee shall continue the payments to the bank. The details of this option is shown below.Position Vehicle Down Payment Chattel Insurance 1-60 Price (20%) (annual) (annual) months Level A 800,000 168,000 16,004 22,089 13,951 Level B 900,000 192,000 17,404 24,930 15,944 Level C 1,000,000 216,000 18,702 27,772 17,937 Level D 1,500,000 312,000 24,120 39,137 25,909 Show your relevant cost comparison. Include tax implications. Should the company provide the car benefit using the current model, or select from the 2 other options? Why? What qualitative factors did you consider? What additional options (aside from those mentioned in the case) you can recommend? What is the merit of this additional option
