Brandt Heating and Cooling is a reputed HVAC (heating, ventilation, and air-conditioning) contractor. Tim Brandt has a reputation for doing quality work and for treating the customer “right.” Brandt serves both homeowners and building contractors. The following table presents Brandt’s income statement for the most recent year:
.:.
Tim believes that while contractors are important from a volume perspective, homeowners are more profitable. Unlike homeowners, building contractors “know the business” and negotiate aggressively.
Required:
For each of the following three decisions, classify whether each item on Brandt’s income statement is controllable and/or relevant. Explain why an item may be controllable/relevant for some decisions but not for other decisions.
1. Whether to give a $50 discount to a regular homeowner customer who complained about the technician showing up late.
2. Whether to send a technician to obtain training in high-voltage work.
3. Whether to replace an aging truck with a newer model.
SOLUTION:
The following three panels provide the required classification for each decision. Notice that in this problem, all controllable items are relevant. This occurs because the status quo is a viable option for each decision. Each decision is of the “whether or not” variety where the “not” option implies choosing the status quo (or not taking any action whatsoever).
| Item | Give Discount? | Rationale |
|---|
| Revenues from homeowners | Controllable and relevant | Will change by different amounts based on the decision. |
| Revenues from contractors | Non controllable | Not affected by the decision |
| Direct costs | Non controllable. | The cost is sunk and therefore not controllable – i.e., the costs for the job have already been incurred. |
| Rental cost | Non-controllable. | This cost is unaffected by the decision. |
| Trucks & other equipment | Non-controllable. | The cost is sunk and therefore not controllable – i.e., the costs for the job have already been incurred. |
| Administrative costs | Non-controllable. | This cost is unaffected by the decision. |
| Item | Train Technician? | Rationale |
|---|
| Revenues from homeowners | Non-controllable. | Not affected by decision as few homeowners need high-voltage work. |
| Revenues from contractors | Controllable and relevant. | Brandt’s revenues to contractors likely would increase if the technician received the high-voltage training. |
| Direct costs | Controllable and relevant. | Controllable and relevant as there would be additional direct costs associated with performing high-voltage work. |
| Rental cost | Non-controllable. | This cost is unlikely to be affected by the decision. |
| Trucks & other equipment | Controllable and relevant. | It is likely that high-voltage work may need additional equipment. Most certainly, more work increases truck operating and maintenance costs. |
| Administrative costs | Non-controllable | This cost is unlikely to be affected by the decision. |
| Item | Replace Truck? | Rationale |
|---|
| Revenues from homeowners | Non-controllable. | Not affected by the decision. The amount of work done is likely to be the same whether or not a new truck is purchased.* |
| Revenues from contractors | Non-controllable. | Not affected by the decision. The amount of work done is likely to be the same whether or not a new truck is purchased.* |
| Direct costs | Non-controllable. | Not affected by decision. Notice that this item does not include the operating costs of trucks, which will change based on the decision. |
| Rental cost | Non-controllable. | Not affected by the decision. |
| Trucks & other equipment | Controllable. | Both the cost of the truck and the operating cost change based on the decision. |
| Administrative costs | Non-controllable. | Not affected by the decision |
* One could argue that an older truck may break down more often and potentially reduces the ability to service a job. Similarly, newer trucks may present a more “professional” image and enhance reputation, which in turn increases the volume of business. Both of these effects suggest that revenues (and therefore direct costs) are also controllable and relevant. However, these effects seem marginal given that Brandt already enjoys a sterling reputation. Thus, we ignore these effects.
This problem can help highlight that the decision context determines the controllability and relevance of a cost or a benefit. Some decisions, such as giving a discount to a disgruntled customer, may only affect revenue with no discernable cost impact. Other decisions, such as whether to replace a truck, affect costs with no discernable revenue impact. Most decisions, however, affect both revenues and costs. Even for these decisions, only some costs and benefits are controllable. Revenues and direct costs from other products or market segments are not controllable if the decision pertains only to some products or market segments.