Given that in the past Air-motion has increased its prices by an additional R8 million in the final month of the contract term, the cost of the 1-year maintenance plan would be R176 million. This

Question: A. WORKING CAPITAL REQUIREMENTS (fleet servicing) kumatima.com is already months behind on its short-term obligations (salaries and other payables) and needs additional funds to source enough jet fuel and pay for monthly operating costs. Most of these costs cannot be easily restructured as the company usually enters into longterm contracts with the relevant parties. However, kumatima.com is considering restructuring its aircraft maintenance contracts in order to save money. Based on an analysis performed recently, the following are probabilities of the number of services to be conducted in total on the fleet of 25 aircraft for a year (routine service takes place every 1-3 days): Total number of services Probability 4 400 50% 8 900 20% 3 400 30% The two options available to kumatima.com are presented below: MAC3761 Test 4 - September 2022 5 TURN OVER CONFIDENTIAL Option A: Pay-as-you-go maintenance (service) Under this option, kumatima.com will only pay for the service done on each aircraft that goes in for maintenance. The recent analysis performed was mainly focused on this option (and kumatima.com has to make payment of R240 000 for this analysis to the consultant within the next 30 days). The average cost of one service is estimated at R36 500. This option requires intense administration to ensure that services are done on time and that the availability of resources and parts is also confirmed timeously. As a result, one full-time senior administration clerk currently working in Operations Department will be required to spend 20% of his time managing the maintenance schedule under this option. He currently earns R500 000 per annum. Option B: 1-year maintenance (service) plan kumatima.com has in the past entered into a fixed year-to-year contract with Air-motion (Pty) Ltd (also referred to as “Air-motion”) to service its entire fleet. However, there are concerns that this may not be as cost effective as Option A above (pay-as-you-go maintenance). Although the contract is signed upfront, payment is only made at the end of the contract term. kumatima.com has recently paid Air-motion R168 million under last year’s contract (inclusive of R8 million relating to late interest charged from the previous year). As kumatima.com is one of its highly valued clients, Air-motion always gives kumatima.com its Air-motion branded headphones to the fixed value of R1,25 million at no extra charge (the headphones are then sold to passengers to use on board at the same value). At the end of each year, kumatima.com has no headphones left in stock. Air-motion’s contract price increases by 4% year on year.