CASE $2$: V & A CARPET CLEANING SERVICES

In March $2003,$ Vincent and Anne$-$Marie Finney started their carpet$-$cleaning services

business in Toronto. The business was geared primarily at young couples, a

market that they felt was growing rapidly. Vincent and Anne$-$Marie had worked

during the previous $10$ years as salaried employees for different types of organizations.

They were frustrated with the fact that their future was in the hands of employers, so

they decided to start V & A Carpet Cleaning Services. After $10$ years of tremendous

success in the business, the couple decided to launch a franchise.

They placed advertisements in different daily newspapers across Canada promoting

the franchise business. Bill and Jill Robinson of Ottawa saw the advertisement and

called V & A for information about the economics and advantages of managing a

carpet$-$cleaning franchise operation. The Finneys provided the following information:

$$ Average revenue for cleaning carpets in each household is $$120.$

$$ A $20\%$ sales commission per contract is secured by a sales representative.

$$ Machine operators receive $$30$ for cleaning the carpets in each household.

$$ Average costs for gas and maintenance for trucks for each household is $$5\mathrm{.}50.$

$$ Maintenance charges are $$400$ per machine for each $100$ houses cleaned.

$$ Monthly rental charges for office and small warehouse for inventories is

$$1,200.$

$$ Annual depreciation for the equipment is $$500.$

$$ Monthly salary paid to Bill and Jill would total $$3,500.$

Other costs include the following:

$$ A $$1,400$ monthly salary for office employees.

$$ A $$500$ yearly expense for various insurance policies.

$$ A $$125$ monthly expense for utilities and telephone.

$$ A yearly $$10,000$ fee for the franchise.

$$ A $$5\mathrm{.}00$ franchise fee for each household cleaned.

Questions

On the basis of the above information, calculate the following:

$1.$ How many carpets would Bill and Jill have to clean each year to start

making a profit?

$2.$ How much revenue would they have to earn each year in order to

break even?

$3.$ How many carpets would they have to clean each year if they want to

earn a yearly profit of $$45,000$ before tax?

$4.$ Prepare a statement of income on the basis of earning $$45,000$ in

profit$$before$$tax$.$FINANCIAL SPREADSHEETS: EXCEL$$

Templates $1$ and $2$ of the decision$-$making tools of the financial spreadsheets

a ccompanying this book can calculate the break$-$even points by using the c ontribution

margin and the PV ratio. Template $1($Break$-$Even Analysis Using the Contribution

Margin$)$ calculates the break$-$even point, in units and in revenue, of a business d ecision

by using the contribution margin. Template $2($Break$-$Even Analysis Using the PV

Ratio$)$ calculates the revenue break$-$even point by using the PV ratio. The break$-$even

point for these two templates can be done for three consecutive$$years$.$