James waters owns \"Carzwash\" a successful car wash and valet business located

Question

James waters owns "Carzwash" a successful car wash and valet business located near a large shopping center in Newtownabbey. He has built up a good reputation since opening the business three years ago, and many of his customers return on a regular basis. Carzwash offers a good quality service at a competitive price. James charges E30 per car for a wash and valet. This price attracts an average of 60 vehicles per week James estimates that he could wash and valet up to 100 cars per week depending on weather conditions and parking spaces on the premises. The variable cost associated with washing/valeting 60 vehicles are F1200 per week, whilst the fixed costs are F400 per week at present. James is satisfied with current customer numbers. However, a local newspaper has printed a story suggesting that a competitor intends to set up nearby, at a filling station. James is investigating two options in order to ensure the long term viability of the business: (i) Reduce selling price: this option open to him would mean reducing the price of each car wash and valet to F 25: or, (ii) Aim for a weekly profit of F200. Explain what is meant by the terms: 'variable cost', fixed cost', breakeven point' and 'margin of safety'. Calculate the number of cars that currently have to be washed/valeted each week in order to breakeven. Calculate the weekly profit that would accrue to James Waters, based on washing 60 vehicles per week. Analyses the implications for Carzwash. of lowering the price of each wash and valet to exist25 per vehicle Calculate the number of additional vehicles to be washed/valeted in order to achieve the desired weekly profit. Evaluate the usefulness of breakeven analysis to a business such as Carzwash.

Explanation / Answer

Variable Cost : These costs vary in direct proportion to quantity sold or unit volume. Variable costs for selling goods, for instance, might include the direct cost the seller pays to acquire each unit.As a result, the total variable cost can be simply cost per unit multiplied by the unit volume.

Fixed Cost : Fixed costs remain fixed, or constant, regardless of unit volume. For example, if the cost of floor space, managers salaries, and janitorial services, do not change with volume, they are fixed costs.

Breakeven Point : Breakeven point means the unit volume that balances total costs with total gains. For the analyst, break even is the quantity Q for which the cash outflows equals the cash inflows, exactly. At the break even quantity, , therefore, net cash flow equals zero.

Margin Of Safety : It is the difference between the intrinsic value of a stock and its market price.

b) Q = F/(P-v)

F= fixed costs = 400

P = Selling price per unit = 30

v = variable cost per unit = 1200/60 = 20

Hence Number of cars for break even = Q = 400/(30-20) = 400/10 = 40 cars

c) Weekly Profit = (Contribution per Car * Number of cars washed) - Fixed costs

Contribution per Car = Revenue per Car - Variable cost per car = 30-20 = 10

Weekly Profit = (10 * 60) - 400 = 600 - 400 = 200

d)calculation of weekly profit on decreasing the price of car washed from 30 to 25 per car washed=

(Revenue per car - Variable cost per car)* Number of cars washed - Fixed costs

= (25-20)*60 - 400 = 300-400 = -100 (negative sign represents loss)

hence Weekly profit of 200 connverted to weekly loss of 100 on decreasing the price of car washed from 30 to 25

(e) Number of additional vehicles to be washed to acheive weekly profit of 200 =

(Fixed Cost + Desired profit)/revised contribution per car - Existing number of cars already washed

= (400 + 200)/ (25-20) -60

= 600/5 -60

= 120-60 = 60

Hence 60 additional cars must be washed in order to acheive the weekly profit of 200

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