Group 5. Garcia. Rodriguez. Serrano.

NET-X, INC. Case Analysis

Recommendation Short Term (First year plan) Our consulting team recommends that Mr. Villavicer and Ms. Aguinaldo hire supervisors to manage Net-X, Inc. in their stead for the following reasons: Net-X would require a per hour rate of P26.00 to convince the partners to resign from their current position. This price is above that which customers are willing to pay. Total fixed cost analysis shows that the business is profitable beyond a charging rate of P18.18 per hour under likely conditions. Additional income, other than those earned from their current jobs will add to new partnership capital for further expansion. As such, this business is suggested to operate with 20 computers for 15 hours daily with a fixed charging rate of P 25 per hour in order to maximize profits. Long Term After having raised enough profits in the first year, Mr. Villavicer and Ms. Aguinaldo can now expand their operations by acquiring additional 10 computers to fully maximize their capacity. Since there are more computers available for rent, an increase in demand can be created by lowering the price to P20.00 per hour. This strategy will earn enough profits for the partners to resign from their previous jobs and work full time as supervisors of the company.

Assumptions 1. The company will be operating in normal conditions, i.e. no computer breakdowns, no employee overtime, no absences, no special and regular holidays. 2. Expected customer demand is relevant between the price range of Php20-25. 3. Electricity is constant whether peak or off-peak hours. 4. Workers are contractual for one year to allow the possibility of the partners to take over the business. Cost Analysis All operating costs of Net-X, Inc., including the allocation of capital expenditures for the month, are fixed. Monthly payments such as rent, telephone, and water expenses are constant from period to period. Although electricity cost is variable with respect to the number of operation hours, it is considered fixed because there are established opening and closing times that will be followed so that electric billings would be virtually identical from month to month. Also, salaries and wages are fixed since employees are expected to work for the same number of hours every month. Lastly, depreciation for capital expenditures is constant for the duration of the useful lives of the capital assets. The cost drivers for all of these costs are different from the revenue driver (computer hours usage). The Work Force Supervisors are effectively paid P9,350 each per month, including fringe benefits. This cost will be eliminated once Mr. Villavicer and Ms. Aguinaldo take over the business. Instead, their profit sharing will provide a salary of P8,500 each plus a ratio of 7:13, respectively, for the remainder.

Group 5. Garcia. Rodriguez. Serrano.

The four staff crews are to follow the prescribed schedule. Each staff will be working one eight hour shift per day, six days a week. Only one staff is assigned on off-peak hours except for Saturdays and Sundays where two staffs are present. Two staff crews will be assigned on peak hours, thus incurring night differential premiums for both staffs every day. The total available supply of work hours per week is 192 (4 staff x 8 hours a day x 6 days a week). While the total hours to be covered for operations is 105 (15 hours a day x 7 days a week).

Sensitivity analysis The expected total computer usage of Net-X for the month is 6,000 hours using a relevant range of 20 computers and 9,000 for 30 computers; thus, following its planned schedule of operations of 15 hours 1 daily from 9am to 12am. The relevant information for different scenarios are as follows. Hire Supervisors (20PCs) Total Cost Demand Break-even price Share of A at P20/hr Share of A at P25/hr Share of V at P20/hr Share of V at P25/hr 109,066.29 6000 hours 18.18 7,106.91 26,606.91 3,828.80 14,326.80 Hire Supervisors (30PCs) 131,594.07 9000 hours 14.62 31,463.85 60,713.85 16,942.08 32,692.08 Work as Supervisors (20PCS) 90,366.29 6000 hours 15.06 16,711.91 36,211.91 12, 921.80 23,421.80 Work as Supervisors (30PCS) 112,894.07 9000 hours 12.54 41,068.85 70,318.85 26,037.08 41787.08

Hiring supervisors does not need the resignation of Mr. Villavicer and Ms. Aguinaldo. Thus, they can keep their monthly salary and still have profits from the new business. In one year (8 months, to be more precise), they will be able to earn enough income to make a new investment of ten additional computers and eventually resign from their previous jobs.

See Excel file for breakdown and other computations