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Managerial Analysis CTS2 Service Construction on the Boeita Full-Srvice Car Wash is nearing completion. The owe separates an affloent suburtan community from a middle-class community. It has two stane-ol-be is Juan Lope, a retired accounting prodessor. The car wash is strategically located on a basy saces In the Uni slow the is stalls, Each stall can provide anything from a basic two-stage wash and rinse to a five-stage ur bath. It is all Touchless," that is, there are no brushes to potentially damage the car. Outside each wa there is also a 400 horse-power vacuum Juan likes to joke that thesse vacuums are so strong that they wi Outside o ment acti optimize sales gro Juan has some important decisions to make before he can open the car wash. First, he knoss th there is one drive-through car wash onhy a 10-minute drive away. t is attached to a gas station: n charges E5 for a basic wash, and 4 if you also buy at least 32 liters of gas. It is a "brush-type wash wth rokating pull the carpet right out of your car if you aren'T careful. brush heads There is also a self-serve "stand outside your car and spray until you are soaked" car waha Several p 15-minute drive away from Juan's location. He went over and tried this out. He went through 3 is cons The Con Trade C to get the equivalent of a basice wash. He knowas that both of these locations always have long lines, which Juan is planning to offer three levels of wash service-Basic, Deluxe, and Premium. The Basic is all is one reason why he decided to build a new car wash. automated, it requires no direct intervention by employees. The Deluxe is all automated except that t the end an employee will wipe down the car and will put a window treatment on the windshicld that redace glare and alllows rainwater to run off more quickly. The Premium level is a "pampered service. Thin wi include all the services of the Deluxe, plus a special wax after the machine wax, and an employce wil vacuum the car, wipe down the entire interior, and wash the inside of the windows. To provide the Pr mium service. Juan will have to hire a couple of "car wash specialists" to do the additional pampering Juan has pulled together the following estimates, based on data he received from the local Chambe of Commerce and information from a trade association. Instruct Answer c a. In li by c b. Wh pria car c. Su the nodasing O Per UnitnilTotal Direct materials per Basic wash Direct materials per Deluxe wash Direct materials per Premium wash Direct labor per Basic wash Direct labor per Deluxe wash Direct labor per Premium wash Variable overhead per Basic wash Variable overhead per Deluxe and Premium washes Fixed overhead Variable selling and administrative expenses all washes Fixed selling and administrative expenses ab alddoO.30 0.80 iss toba1,10 .4 na 0.40 2.40 0.10 0.20 specit for th Insta Go te El17,000 0.10 one 130,500 a- The total estimated number of washes of any type is 45,000. Juan has invested assets of 393.750 He would like a return on investment (ROD) of 20% b. Instructions c Answer each of the following questions a. Identify the issues that Juan 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. Juan 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 Juan should use for each type of wash to achieve his desired ROI of 20%, C C tu tc c. During the first year, instead of selling 45,000 washes, Juan sold 43,000 washes. He was quite a curate 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 expected, and his variable cost per unit was as estimated. Calculate Juan's actual net income and his actual ROI. (Round to two decimal places.) d. Juan 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 Juan do to determine more accurate costs per unit? How will this affect his pricing and, consequently, his sales? a loods Real-World Focus CTS.3 Merck & Co., Inc. (USA) is a global, rescarch-driven pharmaceutical company that discovers develops, manufactures, and markets a broad range of human and animal health products. The following are excerpts from the financial review section of the company's annual report. BYP8-3 Construction on the Bonita Full-Service Car Wash is nearing completion. The owner is Juan Lopez, 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. Juan 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. Juan 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 Juan'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. Juan 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, Juan will have to hire a couple of "car wash specialists" to do the additional pampering. Juan 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 S0.80 Direct materials per Premium wash S1.10 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 $0.20 washes 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. Juan 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 Juan 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) Juan 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 Juan 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, Juan 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 Juan's actual net income and his actual ROI. (Round to two decimal places.) (d) Juan 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 Juan do to determine more accurate costs per unit? How will this affect his pricing and, consequently, his sales

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