Norcross Carpet Cleaning (NCC) is a commercial service specializing in maintaining floor coverings in high-traffic areas such as malls and office buildings. The business is highly seasonal, with high demand in the winter and low demand in the summer. In both seasons, the demand depends on the weather, among other factors. Managers at the company are working on the budget for the following winter season to determine personnel and funding needs. Based on expertise, experience, and regional economic forecasts, they develop the following:

For simplicity, the managers assume that the gross margin and the estimated number of customers are independent. Thus, there are nine possible scenarios. In addition to the cost of the cleaning (included in the gross margin estimates), the managers estimate staffing costs to be $35,000 plus $120 for every client in excess of 1,000. The marketing and administrative costs are estimated to be $20,000 plus 5 percent of the gross margin.

Required

a. Use a spreadsheet to prepare an analysis of the possible operating income for Norcross Carpet Cleaning similar to that in Exhibit 13.16. What is the range of operating incomes?

b. The managers at Norcross would like to be able to visualize these results, to present to the board. Create a graph that illustrates the effect of the number of clients on operating profit for each possible value of gross margin per client.

c. What conclusions about the most favorable scenarios for Norcross do these visualizations suggest? Prepare a short memo that will help the board members understand these conclusions  

Transcribed Image Text:

Scenario Good Fair. Poor Gross Margin per Client (Price - Cost of Cleaning) $120 90 75 Number of Clients 2,000 1,250 750