Identify the issues that dave must consider in deciding

Assignment Help Financial Accounting
Reference no: EM13888871

Construction on the Bonita Full-Service Car Wash is nearing completion. The owner is Dave Kear, a retired accounting professor. The car wash is strategically located on a busy street that separates an affluent suburban community from a middle-class community. It has two state- of-the-art stalls. Each stall can provide anything from a basic two-stage wash and rinse to a five- stage luxurious bath. It is all "touchless," that is, there are no brushes to potentially damage the car. Outside each stall, there is also a 400 horse-power vacuum. Dave likes to joke that these vacuums are so strong that they will pull the carpet right out of your car if you aren't careful.

Dave has some important decisions to make before he can open the car wash. First, he knows that there is one drive-through car wash only a 10-minute drive away. It is attached to a gas station; it charges $5 for a basic wash, and $4 if you also buy at least 8 gallons of gas. It is a "brush"-type wash with rotating brush heads. There is also a self-serve "stand outside your car and spray until you are soaked" car wash a 15-minute drive away from Dave's location. He went over and tried this out. He went through $3 in quarters to get the equivalent of a basic wash. He knows that both of these locations always have long lines, which is one reason why he decided to build a new car wash.

Dave is planning to offer three levels of wash service-Basic, Deluxe, and Premium. The Basic is all automated; it requires no direct intervention by employees. The Deluxe is all automated ex- cept that at the end an employee will wipe down the car and will put a window treatment on the windshield that reduces glare and allows rainwater to run off more quickly. The Premium level is a "pampered" service. This will include all the services of the Deluxe, plus a special wax after the machine wax, and an employee will vacuum the car, wipe down the entire interior, and wash the inside of the windows. To provide the Premium service, Dave will have to hire a couple of "car wash specialists" to do the additional pampering.

Dave has pulled together the following estimates, based on data he received from the local Chamber of Commerce and information from a trade association.

 

Per Unit

Total

Direct materials per Basic wash

$0.30


Direct materials per Deluxe wash

$0.80


Direct materials per Premium wash

$1.10


Direct labor per Basic wash

na


Direct labor per Deluxe wash

$0.40


Direct labor per Premium wash

$2.40


Variable overhead per Basic wash

$0.10


Variable overhead per Deluxe and Premium washes

$0.20


Fixed overhead


$117,000

Variable selling and administrative expenses all washes

$0.10


Fixed selling and administrative expenses


$130,500

The total estimated number of washes of any type is 45,000. Dave has invested assets of $393,750. He would like a return on investment (ROI) of 20%.

Instructions

Answer each of the following questions.

(a) Identify the issues that Dave must consider in deciding on the price of each level of service of his car wash. Also discuss what issues he should consider in deciding on what levels of service to provide.

(b) Dave estimates that of the total 45,000 washes, 20,000 will be Basic, 20,000 will be Deluxe, and 5,000 will be Premium. Calculate the selling price, using cost-plus pricing, that Dave should use for each type of wash to achieve his desired ROI of 20%.

(c) During the first year, instead of selling 45,000 washes, Dave sold 43,000 washes. He was quite accurate in his estimate of first-year sales, but he was way off on the types of washes that he sold. He sold 3,000 Basic, 31,000 Deluxe, and 9,000 Premium. His actual total fixed expenses were as he expected, and his variable cost per unit was as estimated. Calculate Dave's actual net income and his actual ROI.

(d) Dave is using a traditional approach to allocate overhead. As a consequence, he is allocating overhead equally to all three types of washes, even though the Basic wash is considerably less complicated and uses very little of the technical capabilities of the machinery. What should Dave do to determine more accurate costs per unit? How will this affect his pricing and, conse- quently, his sales?

Reference no: EM13888871

Questions Cloud

What is the arbitrage profit as a percentage of par : A 5-year zero coupon bond is stated to yield 10% continuously compounded return for the entire period (holding period return over 5 years) in market A. The same bond is quoted 2% per annum with annual compounding in Market B. Where is the bond cheape..
Program to be completely free : Explain why it is not necessary for a program to be completely free of defects before it is delivered to its customers.
Forecasting system being used by yankee : The Yankee Fork and Hoe Company is a leading producer of garden tools ranging from wheelbarrows, mortar pans, and hand trucks to shovels, rakes, and trowels.
What is the one year rate five years from now : Suppose the spot rates are: 1-Year Rate: 4%, 2-Year Rate: 5.5%, 3-Year Rate 6%, 4-Year Rate: 6.5%, 5-Year Rate: 7%, 6-Year Rate: 9% and 7-Year Rate: 10.5%  What is the one year  rate five years from now?
Identify the issues that dave must consider in deciding : Identify the issues that Dave must consider in deciding on the price of each level of service of his car wash. Also discuss what issues he should consider in deciding on what levels of service to provide.
Case study: too far ahead of the it curve : How did your opinions about what should be done differ before you read the commentaries, and after you read them?
Strategic options for legacy system evolution : What are the strategic options for legacy system evolution? When would you normally replace all or part of a system rather than continue maintenance of the software?
Explain the cost of capital and how it is determined : Explain the cost of capital and how it is determined
What is the payback period for each proposed pizza : Answer on excel:1. What is the payback period for each proposed pizza?2. What is the discounted payback period for each proposed pizza?3. What is the NPV for each proposed pizza?

Reviews

Write a Review

 

Financial Accounting Questions & Answers

  Determine the cost of materials used

Using FIFO, perpetual inventory costing; and the following information, determine the cost of materials used and the cost of the July 31 inventory.

  How much does sara include in her gross income

The church did not keep a record of the amounts given nor the contributors, but the minister estimates that these gifts amount $10,000 in the current year. How should he treat these gifts?

  Showing the effect on the stockholders equity accountson

showing the effect on the stockholders equity accounts.on january 1 2007 frederiksen inc. stockhlders equity category

  Evaluate the break-even point for a multiproduct company

Evaluate the Break-Even Point for a Multiproduct Company and Compute the overall break-even point for the company in sales dollars

  Calculate the number of canoes that paddle away

Calculate the number of canoes that Paddle Away must sell at $710 each to generate $116,000 profit - calculate its new break-even point in units and in sales dollars.

  Prepare a memo to your cfo

Prepare a memo (750-1,000) to your CFO showing the outcome of such a change on current taxes and outlining the needs for making this change.

  What is the companys return on investment

CS Company has a profit margin of 11%. Sales are $320,000, net operating income is $35,200, and average operating assets are $128,000. What is the company's return on investment (ROI)?

  Requisitions raw materials for production

In January, Knox Company requisitions raw materials for production as follows: Job 1 $944, Job 2 $1,500, Job 3 $751, and general factory use $626. Prepare a summary journal entry to record raw materials used

  Per day patient nursing care 120 for 1000 patients 200000

per day patient nursing care 120 for 1000 patients 200000 service fee collected will cover how many dates nursing care

  Deglman manufacturing uses a job order cost system and

deglman manufacturing uses a job order cost system and applies overhead to production on the basis of direct labor

  Prepare goodrows post-closing trial balance at july

Prepare Goodrows post-closing trial balance at July 31, 2012 - Preparing a post-closing trial balance After closing its accounts at July

  Pilgrim corporation processes frozen turkeys

Other products include frozen parts such as wings and legs, byproducts such as skin and bones, and unused scrap items.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd