Acct434 Advanced Cost Management: Week 6 Homework (Handy-Man Services and Gavin and Alex)

Note: Please make sure you review your questions with the questions in this tutorial. There will be times that the numbers are changed but you will be able to follow the solution by checking the worksheet cells for links and formulas.

ACCT434 Advanced Cost Management
Week 6 Homework (Customer Profitability Capital Budgeting)

Problem 1:
Handy-Man Services is a repair-service company specializing in small household jobs. Each client pays a fixed monthly service fee based on the number of rooms in the house. Records are kept on the time and material costs used for each repair. The following profitability data apply to five customers:
Customer Revenues Customer Costs
Marveline Burnett 300 225
J Jackson 200 305
Roger Jones 80 75
Paul Saas 75 110
Becky Stephan 350 220

a. Compute the operating income for each of the five customers.
b. What options should Handy-Man Services consider in light of the customer profitability results?
c. What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?

Problem 2:
Gavin and Alex, baseball consultants, are in need of a microcomputer network for their staff. They have received three proposals, with related facts as follows:
Proposal A Proposal B Proposal C
Initial investment in equipment 90,000 90,000 90,000
Annual cash increase in operations:
Year 1 80,000 45,000 90,000
Year 2 10,000 45,000 -
Year 3 45,000 45,000 -
Salvage value - - -
Estimated life 3 yrs 3 yrs 1 yr

The company uses straight-line depreciation for all capital assets.

a. Compute the payback period, net present value, and accrual accounting rate of return with initial investment, for each proposal. Use a required rate of return of 14%.
b. Rank each proposal 1, 2, and 3 using each method separately. Which proposal is best? Why?
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