#1 Question: Related to Problem 1, compute the operating income for each of the five customers.
Answer:
Marveline Burnett: $300 Customer Revenues; $225 Customer Cost; $ 75 Operating income.
J Jackson: $200 Customer Revenues; $305 Customer Cost; ($105) Operating income.
Roger Jones: $80 Customer Revenues; $75 Customer Cost; $5 Operating income.
Paul Saas: $75 Customer Revenues; $110 Customer Cost; ($35) Operating income.
Becky Stephan: $350 Customer Revenues; $220 Customer Cost; $130 Operating income.

#2
Question: Related to Problem 1, what options should Handy-Man Services consider in light of the customer-profitability results?
Answer:
Suggested Responses:
- Pay increased attention to the profitable customers Stephan and Burnett.
- Seek ways of reducing costs and increasing revenues for the loss accounts of J Jackson and Paul Saas. Work with the customers so their behavior reduces overall costs. Reduce costs with better scheduling. Maybe a different fee schedule needs to be implemented depending on the age of the house, the distance to the home, if the repair is preventive or an emergency, and so forth. Determine whether the operating income pattern will probably continue or not and why.
- As a last resort, the company may want to discontinue the Jackson account if the customer does not agree to a fee increase and the operating loss pattern is expected to continue.

#3
Question: Related to Problem 1, what problems might Handy-Man Services encounter in accurately estimating the operating costs of each customer?

Answer:
Suggested Response:
Problems in accurately estimating operating costs of each customer include:
- The basic underlying records may not be accurate.
- Some repair personnel may be efficient and more experienced, others may be less experienced and slower, and still others may "chit-chat" more with the clients.
- Costs that are allocated to more than one customer may be distorting operating income. For example, how is the cost of a trip for parts to three different customers allocated?

#4
Question: Related to Problem 2, 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%.

Answer:
Payback for Proposal A:
Year 1
$80,000

Year 2
10,000
Payback is 2 years $90,000

Payback for Proposal B:
Year 1
$45,000

Year 2
45,000
Payback is 2 years $90,000

Payback for Proposal C:
Year 1
$90,000
Payback is 1 year

Net Present Value:
Proposal A:
Predicted
Cash Flows
Year(s)
PV Factor
PV of Cash Flows

Investment
$(90,000)
0
1.000
$(90,000)