Bond Construction Company

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Aula 06- Bond Construction Company Upon completing a bachelor’s degree program in business in 1992, Allen Bond opened his own construction business that specializes in building garages for residential homes. By 1998, the firm had grown substantially and employed 21 carpenters who were paid $25,000 per year. This was the entire employment complement of the firm; Mr. Bond provided all managerial, accounting, and clerical functions. During 1998, the company built 400 garages. Excluding materials, which are provided by the customer, each garage sells for $1,600. The firm has a large stock of capital equipment including trucks, tools, and surveying instruments. Bond has developed a measure for a unit of capital that includes one truck and a specified amount of other equipment, including a ladder, several power tools, and an air compressor. Currently, the price to rent one of these units is $5,000 per year, and 15 units are rented. Costs of capital and labor are the only significant explicit expenses. The labor and capital inputs can be varied daily. Bond used a $100,000 inheritance to start the business and is quite pleased that he has received several offers in the past month to sell the firm for $300,000. The firm’s accountant has prepared an income statement for 1998 that shows a profit of $15,000 after paying Bond a salary of $25,000 for the year. The market interest rate is 14 percent for year for loans to risky businesses such as this one. Bond has just completed a managerial economics course in the evening school program of the local community college. Although he is not sure he understood everything, the class did make him aware of many problems he had not considered before. For example, is Bond Construction really earning a profit? Is the current mix of capital and labor optimal? The pressures of managing this business are beginning to bother Bond,

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