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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.

 

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                                                Customer Revenues    Customer Costs

Marveline Burnett                                 $300                       $225

J Jackson                                             200                         305

Roger Jones                                           80                          75

Paul Saas                                              75                         110

Becky Stephan                                     350                         220

Question 1: Compute the operating income for each of the five customers.  (five points)

Question 2: What options should Handy-Man Services consider in light of the customer-profitability results?  (five points)

Question 3:  What problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?  (five points)

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

0

   Year 3

45,000

45,000

0

Salvage value

0

0

0

Estimated life

3 yrs

3 yrs

1 yr

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

Question 1: 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%.  (10 points)

Question 2: Rank each proposal 1, 2, and 3 using each method separately.  Which proposal is best?  Why?  (five points)

 

 

 

 

1. (TCO 9) To guide cost allocation decisions, the benefits-received criterion (Points : 3)