Mr. Speedy is a heating and air conditioning repair business that was establishe

Question

Mr. Speedy is a heating and air conditioning repair business that was established 23 years ago by George Moustakis. For the first 15 years Mr. Speedy grew steadily, but then George decided that the business was as large as he could successfully supervise Today the business revolves around 20 vans that are on the streets, and another four for backup in the shop. The 20 vans are not all out at once as there is day, night, and weekend coverage using 32 technicians. Each technician is assigned to a van, and each van has only one or two technicians assigned to it. George has tried using a smaller pool of vans, which requires rotating them among the technicians. He found that this radically increased his costs. First, the vehicles were treated more like somebody else's problem. The drivers were harder on the vehicles, and they did not communicate as well with the mechanics. Second, and more importantly, restocking the truck at the end of a shift was sometimes slipshod. Now the technicians are very consistent about restocking the parts used during the day, when they still have paperwork on what was done Otherwise, they may be short the next day. The technicians receive a completion bonus, which may equal their normal salary. Thus, interrupted jobs that require a return to the warehouse are the bane of the technicians. The average age of George's fleet of vans has crept up and is now 4 years. His vans generally last 7 years before they are abandoned. He is getting complaints from the technicians and the mechanics. The vans are spending more time in the shop. Most of the problems can be dealt with after the end of a shift, and only a few interrupt the work of the 148

Explanation / Answer

Answer 1 :- here we find that the there are special vans that are used in the providing repairing services to the clients in the city. Here we have two proposal regarding replacement of these special vans , First proposal is from shop manager and in his proposal he had taken the fact and figure which is market oriented. He had stared its calculation or done all its calculation depends upon the ready market value of the vans . in his porposal, he had made the market value of the vans as its basic figure and there after done all the calculation.Secondly, in his calculation we find that the in first year the van losses 45% of its market value and that its look but obvious due to a main reason that the van is of special nature and secondly continuous wear and tear of these vans. The shop manager is taken maintance cost as the cost which is to be incurred in order to continue the opeartion of the van. here we have an observation that in the intial years the total cost of the van ( including loss in the market share + interest on the lost market share + maintainence cost) are high and as the time passes it is going down . the cost almost down 50% during second year of the opeartion or continuation of the vans and becomes somewhat becomes statics in later years.

On the another hand , On going through the proposal of the bookkeeper , he had made the depriciation on the assets i.e. Vans as the basic mode of the calculating cost incurred on the Vans. he had made the depriciation calculation as prescribed in the current tax laws of the country. here , we find that the assets losses its major value in the second year of the opeartion as the depriciation % increases from 20% to 32% from first year to second year and again comes down to 19.2 % from 32% in third year. Then bookkeeper had taken the opearting cost as one of the paramerter in the cost component . here the total cost component first increses very rapidly and then decreses rapidly again in the fifth year the cost increses in comparison to the fourth year 10% appox. Here the cost portion is some what showing the zig zag partern , which is somewhat developing a unconfortable zone for the decision making.

Recommendation :- we will go ahead with the proposal of the Shop manager . the following are the factors to choose this option -

1) Taken a more realistic veiw on defining the assets valuation by considering market value as the basic figure of calculation.

2) In the calculation he has taken the loss on account of loss of market share and corresponding interest which we have to pay as the cost component is adding a favourable point in his proposal.

3) maintainence cost seems to be more accurate expenditure in this type of special work assingment , thus adding a positive note in the proposal

4) The total cost trend clear reflect the real sutuation that during the initial years these special assets losses most of its market value and then their rate of value depriciation comes down and becomes somewhat static in later years. The total cost partern of shopkeeper clearly reveal the same . adding a positive note to its proposal

the above factors had forced us to go for shop keeper proposal any deviation from the above factors will lead us to change our recommendations.

Answer 2_ Projection for required numbers of backup vans for a given fleet age average / distribution = we can project the required number of the back up vans required by assessing the following data :-

1) what is the earning from each vans moving around the city in order to provide repairing services.

2) Quantum of the loss is to bear if there is no back up van.

3) Addtional benefit deviring with back up van , whether in quantity terms or quatity terms.

4) Additional Cost of maintainence of these back up vans

5) addtional revenue generated due to these back up vans

Analysis to perform in order to get the number of the back up vans - With the addtional cost nad additioanal benefit we can determine the equilibrium position from that we can find out the number the backup vans which resulted in the maximum profit at minimum cost.

The following data is required for the above analysis :-

1) Earning from each vans

2) loss incurred if the facility of the back up vans is not there.

3) alternative cost of hiring these back up service if own back up vans is not there.

4) incremental benefit derive from these back up vans.

5) Increamental cost incurred for these back up vans

6) what is the rate of return on other investment in the market if we subsitute the investment on these back up vans to other investment products.

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