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Dave's Plumbing: Evaluating Business and Financing Options

Factors to consider when evaluating take-home pay

Group Case: Dave’s Plumbing Dave, a British Columbia resident who has been an employee of Lonsdale Plumbing for eight years, recently started doing his own projects as a part-time side job. Dave earns $32 per hour at Lonsdale, working an average of 2,000 hours per year. With his own business, Dave is billing out a rate of $45 per hour. Dave is considering quitting his job at Lonsdale and working for his own business full-time. He believes he is earning more money working for himself, but is unsure about how much more. He wants a breakdown of his take-home pay as an employee versus as an entrepreneur (assuming 2,000 hours a year). He also wants a detailed analysis on the other major factors in making a career decision like this, including the points raised about his business in this case. Dave isn’t sure how he should be accounting and billing for small materials such as glue, screws, and nails on jobs. He originally planned to include those in his materials costs by marking up materials 10%, but suspected that he was losing money on materials considering purchasing time and effort, transportation, and storage. Dave is now wondering if supplies and small parts should be marked up at a higher rate or perhaps there is a different way to cost out minor materials? Also, he wants to know if there is a more analytical/accurate way to track material costs instead of relying on his hunches. Assuming he goes ahead with his plan to quit his job and work alone, Dave is expecting to generate first-year revenues equal to his labour bill-out rate for 2,000 hours, plus 30% more for materials sales (with markup). He expects direct materials to be 20% of revenues, while other costs will total 10% of revenues. In his second year, Dave is projecting 10% growth in both revenues and expenses. Dave is thinking about starting things off with a bigger bang. He is wondering if he should hire his good friend, Kenna as a helper. Kenna is a fellow plumber with some electrical, drywall, and general renovation experience. If Dave hires her at $30 per hour, he can boost first-year revenues by 50% (materials and other costs would remain as the same percentage). However, Dave would need more storage space, so he would need to rent a warehouse at a monthly cost of $600. Under this approach, year-over-year growth would be increased to 12%. To attract more business, Dave would spend $300 a month on mail-out flyers and perhaps some other marketing (he would like some advice on this). Under this scenario, Dave is wondering if it is worthwhile to incorporate- he wants a detailed pros and cons analysis. Dave is also wondering about how to evaluate business performance. Although he will try to convince customers to allow him to bill them at the end with tricky jobs, the fact is most will want a quote before work starts. Hence, he is wondering about how to evaluate the different elements in such jobs- direct materials, direct labour, overhead. This is especially tricky if he hires Kenna. He wants some tips on evaluating employee performance and communicating effectively. Finally, Dave is looking into investing into a new truck with some new equipment. This will allow him to take on bigger jobs and be more efficient with transporting materials, which will boost first-year revenues by $10,000 in any scenario (all other costs remaining the same), and the boost will be sustainable in future years. The truck and equipment will cost Dave $30,000 and are expected to last 4 years with a salvage value of $2,000. Since Dave doesn’t have a lot of cash, he will need to raise this money if he chooses to make the upgrades. Dave can borrow funds from the bank at a rate of 5.50%. However, he presumes debt to be risky (but isn’t sure why). Alternatively, a friend, Guy, has offered to give him $30,000 in exchange for a 10% stake in the new business. Dave is thinking about countering him with an offer of 5% of revenues for the first five years. Dave believes Guy will accept the offer, but isn’t sure it is a smart one on his part. Dave wants advice on his financing options and if he should accept financing at all- he feels like he has enough money to start the business conservatively with a close eye on expenses. INSTRUCTION TO ANSWER This section is a major part of the report. Please Please list and discuss in-depth the major accounting, finance, and business issues raised in this case. Please follow APA 7th edition format for references and in-text citations if any.

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