Reference no: EM131139611

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 else's 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 George's 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 the technicians. 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 $14,000, the liners add another $4000, and the truck’s 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. 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, what van replacement schedule do you recommend? What factors could cause your recommendation to change?