Which parameters are most critical in making this decision?

by Ge Show more 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 elses 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 Georges 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 thetechnicians. George has asked his shop manager and his bookkeeper to analyze the economics of van replacement using a 10% interest rate for the time value of money. Their responses are the two memos that follow this introduction. These vans are somewhat special. After they are purchased from a dealer another vendor installs a van liner designed for storage of parts. Then the van is completely stocked. New the vans cost about $14000 the liners add another $4000 and the trucks mini-inventory costs another $5000. When a truck is retired its inventory can be transferred but its liner is worthless. The annual maintenance costs for the vans start at $500 per year and increase by $200 each year thereafter. As the vans age there begins to be more of an operating cost due to missed calls. These costs begin at $250 and increase by $750 per year thereafter. Options 1. Assume a 40% marginal tax rate for combined state and federal income taxes and use a 6% after-tax interest rate. Ignoring capital gains and investment tax credits does your recommendation change? 2. Focus on the total number of vans and what changes in the replacement schedule would be necessary to change the number of backup vans. Which parameters are most critical in making this decision? Show less

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