Question: Construction on the Atlantis Full-Service Car
Construction on the Atlantis Full-Service Car Wash is nearing completion. The owner is Jay Giolti, 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-theart stalls. Each stall can provide anything from a basic two-stage wash and rinse to a five-stage luxurious bath. It is all “touchless,†meaning there are no brushes to potentially damage the car. Outside each stall, there is also a 400- horsepower vacuum. Jay 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.
Jay has some important decisions to make before he can open the car wash.
First, he knows that there is one drive-through car wash attached to a gas station only a 10-minute drive away. It charges $5 for a basic wash, and $4 if you also buy at least 30 litres 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. 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 he decided to build a new car wash.
Jay 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 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, Jay will have to hire a couple of car wash specialists to do the additional pampering.
Jay has made the following estimates, based on data he received from the local chamber of commerce and information from a trade association:
The total estimated number of washes of any type is 45,000 per year. Jay has invested assets of $324,000. He would like a return on investment of 25%.
Instructions
a. Identify the issues that Jay 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. Jay estimates that of the total 45,000 washes, 20,000 will be basic, 20,000 will be deluxe, and 5,000 will be premium. Using cost-plus pricing, calculate the selling price that Jay should use for each type of wash to achieve his desired ROI of 25%.
c. During the first year, instead of selling 45,000 washes, Jay 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 Jay’s net income and his actual ROI.
d. Jay is using a traditional approach to allocate overhead. As a result, 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 Jay do to determine more accurate costs per unit? How will this affect his pricing and, consequently, his sales?
Transcribed Image Text:
Per Unit Total Direct materials per basic wash Direct materials per deluxe wash Direct materials per premium wash $0.25 0.75 1.05 Direct labour per basic wash n/a Direct labour per deluxe wash 0.40 Direct labour per premium wash 2.40 Variable overhead per basic wash 0.10 Variable overhead per deluxe or premium wash 0.20 Fixed overhead $112,500 Variable selling and administrative expenses-all washes Fixed selling and administrative expenses 0.10 121,500
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