ALMA CarFix Ltd, a local car service center received an offer from one of the clients offering the company a
one-year contract for additional work. The client requires a discount of 12% to be allowed on the total
invoice value. Given the following information:
1- Additional required capital (fixed assets) investments will be:
Equipment
Computers and Software
$18,000
$14,000
The "Equipment" must be purchased by the ALMA CarFix Ltd. and will not be usable for any other contract.
ALMA CarFix Ltd. can either purchase the computers (including software) for $12,000 or lease them for
$6,000 per year. The "Computers and Software" may be used on other work after the end of this particular
contract for 2 additional years.
Additional workers will be required. Five full-time skilled mechanics earning $10 per hour will each work 40
hours per week on the new contract. They are each allowed 4 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
10% unsold hours available for any other jobs coming into the car service center. One full-time car cleaner
will be required earning $15,000 per annum.
2- The client claimed that the likely increase in sales volume resulting from the new contract could be 5,000
hours charged at a rate of $26.00 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 margin of 10% before discount. The increase
in paint sales is calculated on the basis of $5.00 per hour with an average margin of 30% before discount.
3- Additional annual overheads will be as follows:
Total Variable Overhead costs
Total Cash Fixed costs
Depreciation is calculated on a straight-line basis.
15,000
8,000
You were hired as a consultant to provide your opinion on the acceptability of the client's proposal.
Required:
(a) Highlight briefly all financial and nonfinancial considerations relevant to the decision-making process.
(b) Write a memo 3 pages max (including detailed calculations and any assumptions you have made) and give
advice to ALMA CarFix Ltd management indicating the financial and nonfinancial advantages and
disadvantages of the proposal.