Mr. Speedy is a heating and air conditioning repair business that was establishe
ID: 2787931 • Letter: M
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 148Explanation / Answer
The question here talks of the most ecnomical way of van replacement.
As the details are given vans life is 7 years.
Operating cost is 500 for 1st year and increases by 200 thereafter till the 7th year.
In exhibit 1 drop in value is of 8000 and so on. Interest on salvage value is 10% of the drop in value as calculated.
As per the book keeper the life of the van should be 5 years so as to avoid more operating costs. He also uses MACRS as a better way of allocating depreciation expense. Interest on book value is 10% and the annual operating expense each year increase by 750 $.
Total costs are more on the 2nd method.
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