CarFix Ltd, a local car service center received an offer from one of the clients offering the company a oneyear contract for additional work. The client requires a discount of 10% to be allowed on the total invoice
value. Given the following information:
1- Additional required capital investments will be:
Equipment $10,000
Computers and Software $15,000
The “Equipment” will not be usable for any other contract. The “Computers and Software” may be used on
other work after the end of this particular contract.
2- Additional workers will be required. Three full-time skilled mechanics earning $10 per hour will each
work 39 hours per week on the new contract. They are each allowed 6 weeks per year paid holidays and
2 weeks paid training. Workers efficiency is 95% measured as the ratio of sold hours/hours attended.
Training time and holiday time are charged to direct costs of the department. For each worker the new
contract will leave some unsold hours available for any other jobs coming into the car service center.
One full-time car cleaner will be required earning $12,000 per annum.
3- The client claimed that the likely increase in sales volume resulting from the new contract could be 4,750
hours charged at a rate of $20.00 per hour before discount. In addition, the increase in sales of car parts
is estimated on the basis of $50.00 per hour with an average gross profit of 10% before discount. The
increase in paint sales is calculated on the basis of $4.00 per hour with an average gross profit of 30%
before discount.
4- Additional annual overheads will be as follows:
Variable costs 5,000
Fixed costs 6,000
5 Depreciation is calculated on a straight-line basis as follows:
Computers and Software 25%
You were hired as a consultant to provide your opinion on the acceptability of the client’s proposal.
Required:
(a) Evaluating the financial aspects of the proposal; and
(b) Highlighting briefly other considerationsrelevant to the decision-making process.
(c) Write a memo (3 pages max. including any assumptions you have made; show allsupporting calculations
and give advice) to CarFix Ltd management.
CASE STUDY (2) (Mark 35%):
The following monthly data in contribution format are available for the MN Co. and its only product:
Total Per Unit
Sales……………………………………………………………. $83,700 $279
Variable expenses………………………………………. 32,700 109
Contribution margin…………………………………… 51,000 $170
Fixed expenses……………………………………………. 40,000
Net operating income…………………………………. $11,000
The Company is currently using 70% of its available capacity. selling 300 units of product per month.
Required: (each point is separate)
a. Management is contemplating the use of plastic gearing rather than metal gearing in its product. This
change would reduce variable expenses by $18 per unit. The company’s sales manager predicts that
this would reduce the overall quality of the product and thus would result in a decline in sales to a
level of 250 units per month. Should this change be made?
b. What is the sales volume required to achieve a target profits margin 20%?
c. Management wants to increase sales and feels this can be done by cutting the unit selling price by
$22 and increasing the advertising budget by $20,000 per month. Management believes that these
actions will increase unit sales by 50%. Should these changes be made?
d. An order has been received from an overseas customer for 125 units to be delivered this month at a
special discounted price of $95. This order would have no effect on the company’s normal sales and
would not change the total amount of the company’s fixed costs. If the offer is accepted, only 20% of
variables expenses will be avoided. By how much would this special-order increase (decrease) the
company’s net operating income for the month?
e. MN Co. is expecting to experience severe financial difficulties and has applied for a large guaranteed
loan. As a condition for obtaining the guarantee, the Bank mandates that the company significantly
reduce its break-even point. Highlight and discuss with examples all possible strategies a company
might consider to meet required conditions (500 words max).