ancrumc
Oct 9, 2007, 08:31 AM
Hello,
I'm working on a group project and I'm trying to get answers on if it possible to calculate the ROI with the information given in the case and how will that be done.
Also, for my Cost Plus info - I came up with figures like 1.98 for Basic and 7.70 for Premium. I'm sure if that is correct.
Also, I did not use the admin and selling fees when using the Cost-plus method, but in order to get the income, I'm assuming I have to create a statement of earnings to calculate the ROI Income/Invested Capital.
Case 3
Construction on the Stellar Full-Service Car Wash is nearing completion. The owner is Misu Alexander, 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-state wash and rinse to a five-stage luxurious bath. It is all ‘tough-less’, that is, there are no brushes to potentially damage the car. Outside each stall there is also a 400 horse-power vacuum. Misu likes to joke that these vacuums are so strong that they will pull the carpet right out of your car of you aren’t careful.
Misu has some important decisions to make before she can open the car wash. First, she 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 Misu’s location. She went over and tried this out. She went through $3 in quarters to get the equivalent of a basic wash. She knows that both of these locations always have long lines, which is one reason why she decided to build a new car wash.
Misu 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 except 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, Misu will have to hire a couple of ‘car wash specialists’ to do the additional pampering.
Misu has pulled together the following estimates, based on data she received from the local Chamber of Commerce and information from a trade association:
Per Unit Total
Direct materials per Basic wash $0.25
Direct materials per Deluxe wash 0.85
Direct materials per Premium wash 1.05
Direct labor per Basic wash n/a
Direct labor per Deluxe wash 0.40
Direct labor per Premium wash 2.50
Variable overhead per Basic wash 0.10
Variable overhead per Deluxe & Premium washes 0.20
Fixed overhead $112,500
Variable selling and administrative expenses all washes 0.10
Fixed selling and administrative expenses 121, 500
The total estimated number of washes of any type is 45,000. Misu has invested assets of $281,250. She would like a return on investment (ROI) of 28%.
Instructions
a. Identify the issues that Misu must consider in deciding on the price of each level of service of her car wash. Also discuss what issues she should consider in deciding on what levels of service to provide.
b. Misu 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 Misu should use for each type of wash to achieve her desired ROI of 28%.
c. During the first year, instead of selling 45,000 washes, Misu sold 43,000 washes. She was quite accurate in her estimate of first-year sales, but she was way off on the types of washes that she sold. She sold 3,000 Basic, 31,000 Deluxe, and 9,000 Premium washes. Her actual total fixed expenses were as she expected, and her variable cost per unit was as estimated. Calculate Misu’s actual net income and her actual ROI.
d. Misu is using a traditional approach to allocate overhead. As a consequence, she 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 Misu do to determine more accurate cost per unit? How will this affect her pricing and consequently her sales?
I'm working on a group project and I'm trying to get answers on if it possible to calculate the ROI with the information given in the case and how will that be done.
Also, for my Cost Plus info - I came up with figures like 1.98 for Basic and 7.70 for Premium. I'm sure if that is correct.
Also, I did not use the admin and selling fees when using the Cost-plus method, but in order to get the income, I'm assuming I have to create a statement of earnings to calculate the ROI Income/Invested Capital.
Case 3
Construction on the Stellar Full-Service Car Wash is nearing completion. The owner is Misu Alexander, 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-state wash and rinse to a five-stage luxurious bath. It is all ‘tough-less’, that is, there are no brushes to potentially damage the car. Outside each stall there is also a 400 horse-power vacuum. Misu likes to joke that these vacuums are so strong that they will pull the carpet right out of your car of you aren’t careful.
Misu has some important decisions to make before she can open the car wash. First, she 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 Misu’s location. She went over and tried this out. She went through $3 in quarters to get the equivalent of a basic wash. She knows that both of these locations always have long lines, which is one reason why she decided to build a new car wash.
Misu 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 except 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, Misu will have to hire a couple of ‘car wash specialists’ to do the additional pampering.
Misu has pulled together the following estimates, based on data she received from the local Chamber of Commerce and information from a trade association:
Per Unit Total
Direct materials per Basic wash $0.25
Direct materials per Deluxe wash 0.85
Direct materials per Premium wash 1.05
Direct labor per Basic wash n/a
Direct labor per Deluxe wash 0.40
Direct labor per Premium wash 2.50
Variable overhead per Basic wash 0.10
Variable overhead per Deluxe & Premium washes 0.20
Fixed overhead $112,500
Variable selling and administrative expenses all washes 0.10
Fixed selling and administrative expenses 121, 500
The total estimated number of washes of any type is 45,000. Misu has invested assets of $281,250. She would like a return on investment (ROI) of 28%.
Instructions
a. Identify the issues that Misu must consider in deciding on the price of each level of service of her car wash. Also discuss what issues she should consider in deciding on what levels of service to provide.
b. Misu 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 Misu should use for each type of wash to achieve her desired ROI of 28%.
c. During the first year, instead of selling 45,000 washes, Misu sold 43,000 washes. She was quite accurate in her estimate of first-year sales, but she was way off on the types of washes that she sold. She sold 3,000 Basic, 31,000 Deluxe, and 9,000 Premium washes. Her actual total fixed expenses were as she expected, and her variable cost per unit was as estimated. Calculate Misu’s actual net income and her actual ROI.
d. Misu is using a traditional approach to allocate overhead. As a consequence, she 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 Misu do to determine more accurate cost per unit? How will this affect her pricing and consequently her sales?