Casey runs a carpet cleaning business that serves two major types of customers: motels and residential homes. Currently, Casey spends three days each week cleaning the carpets and upholstery in six motels. He devotes the remaining two days of each week to cleaning the carpets and upholstery of individual residences. Casey has asked for your help in determining whether he should drop his motel customers and focus solely on residences. Although he likes the steady business the motels provide, he does not like the price. You gather the following additional information about Casey and his business:
• Casey works 50 weeks a year. He works 10 hours a day Monday through Wednesday, the days he cleans the motels. He works an average of 6 hours a day on Thursday and Friday, the days he cleans residential homes. Casey does not work weekends. Casey values his work time at $15 per hour.
• Casey receives $150 in revenue for each motel he cleans and $80 (on average) in revenue for each house he cleans. Casey cleans two motels per day on Monday through Wednesday and three houses per day on Thursday and Friday.
• Casey uses a higher grade cleaner for residences than for motels. Casey figures that he spends $20 in supplies per residential customer and $30 in supplies per motel. Casey leases his van and other equipment for $7,000 per year. Of this, $1,500 worth of equipment is used only for the motel cleaning jobs.
• Casey takes out ads in the local newspapers and yellow pages to generate residential business. (Casey does not incur advertising costs related to the motels since he's had the motel business for years.) He estimates this cost at $5,000 per year.
• Because he is under contract, Casey needs to hire another company to clean the motels during the two weeks that he is on vacation (this company does not clean any residences for Casey during these two weeks). While Casey still receives the $150 fee per motel, he pays the other cleaning company a flat wage of $175 per motel (the other company uses its own supplies and employees to do all the work).
• Casey works out of his home and uses his kitchen table as his office. He figures that he spends about $500 a year on supplies and $1,000 on telephone expenses. (These expenses cannot be directly traced to either motels or residences.)
Required:
a. Create an annual contribution margin statement by customer (motels and residences) for Casey. (Be sure to include $15 per hour for Casey's time.)
b. Based on your analysis, should Casey drop his motel clients? Assume that if he drops the motel business, Casey can double his residential business if he also doubles his advertising budget. (Be sure to consider the value of any savings in Casey's time.)