Ma2 Assignment Question 1

556 words - 3 pages

Question 1 (10 marks)

Vaughan Speed Clean — budgeting

The Vaughan Speed Clean company is a young company that operates three car wash locations in the Greater Toronto Area. The owner relies on the abilities of three managers to run the car wash locations. At the end of each month, the owner evaluates the performance of each car
wash location. His evaluations determine the size of the location manager’s bonus. If the location achieves an annual ROA1 of 10%, the location manager gets $1,000. The bonus is also augmented by $1 for every $10 the location exceeds its profit target.

However, the bonus contract gives the owner the right to make subjective adjustments for the effects of factors he deems outside the control of the location managers. In the past few months, he has made such adjustments for the adverse effects on revenue of having city workers
repaving the street ...view middle of the document...

The budget, which is updated at the beginning of the month, is prepared on an assumption of hours of good weather. Inevitably, those assumptions are not accurate.

The month of November 2013 was an atypical month. It snowed and rained many more hours than were assumed in the budget, and actual profits for the three locations were below the budgeted profit level. The results for the Jane-HW7 location are shown in Exhibit 1. Exhibit 2 shows some operating assumptions and statistics for the month. The Jane-HW7 location has an average of $600,000 of total assets and is open every day, 10 hours per day, when it is not raining. When it is raining, the car wash is closed. The car wash employees are paid the legally required minimum wage plus a fixed amount for each car wash completed, so labour costs are highly variable with revenues.

Exhibit 1: Profit compared to budget for Jane-HW7 — November 2013

Budget1 Actual Variance

Revenue
Variable expenses, including wages
(50% of revenues)
$184,000

92,000
$120,555

60,277
$63,445 U

31,723 F
Fixed expenses 53,820 55,000 1,180 U
Total expenses 145,820 115,277 30,543 F Profit $ 38,180 $ 5,278 $32,902 U

1Based on 800 hours of good weather

Exhibit 2: Operating statistics for Jane-HW7 — November 2013

Budgeted Actual

Average number of vehicles washed in a good weather hour 23 27
Average revenue per vehicle $10 $9.50
Total hours in month (averaged) 920 920
Hours of bad weather 120 450
Hours of good weather 800 470

Required

a. How large will the bonus be for the Jane-HW7 manager in November 2013? (4 marks)

b. Was the Jane-HW7 location properly managed in the November 2013 quarter? Your answer should consist of variance calculations (based on information provided in Exhibit 2) and an assessment of which variances are controllable. (6 marks)

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