El Conejo Auto Clinic (A)

Alex Yianna, Administrator of El Conejo Auto Clinic, was in the process of preparing his budget for the upcoming fiscal year. He had obtained a great deal of information from his supervisory staff, and now it was up to him. His staff assistant to put the information together in a format that could be presented to the company's board of directors.

BACKGROUND

El Conejo Auto Clinic had been formed over five years ago. Initially its only line of business was muffler replacements. As the quality of original equipment mufflers improved, and as Mr. Yianna realized that the company's customers were interested in more than just muffler replacements, El Conejo expanded its product lines. Currently, the company offered four services (or "jobs," as they frequently were called): muffler replacement, tune-up, brake replacement, and lube and oil change.

A distinctive feature of the clinic was its use of mechanic assistants. Since much of the work traditionally done by mechanics did not require the skill of a trained mechanic, Mr. Yianna realized that he could offer lower prices to his customers by having mechanics only perform those tasks that required their specialized skills. The remaining tasks were done by lower-skilled, and hence lower wage, mechanic assistants.

Another distinctive feature of the clinic was its testing function. Mr. Yianna had purchased some highly sophisticated equipment that allowed him to test the work of every job to make sure that there were no defects. The equipment that tested muffler replacement, for example, assessed the quality of the seals between the muffler and tailpipes to make sure that they would not rupture after only a few hundred miles of driving. Similarly, other equipment tested the timing of an engine following a tune-up.

FINANCIAL INFORMATION

Mechanics earned $30 per hour; mechanic assistants earned $15 per hour. Both figures included fringe benefits. For ease of computation, supplies were classified into units. Each job required a different number of units, and the units for different types of job cost different amounts each. For example, a supply unit for the Muffler Replacement job cost $25, whereas supply units for Tune-ups and Brake replacements were only $10 each. For a Lube and Oil Change, the supply unit cost was $2.50. Testing was somewhat simpler, since each test cost an average of $15.

Exhibit 1 shows the supervisors' collective projections for the annual volume for each of the clinic's four jobs. It also shows, for each job, the budgeted price, minutes needed by mechanics and mechanic assistants, and the number of supply units and tests needed. The clinic also had fixed expenses of $280,000, none of which could be attributed to specific jobs.

With this information in hand, Mr. Yianna felt he was ready to prepare the first cut at the budget. He asked his staff assistant, Athena Marco, to prepare a separate budget for each job, as well as for the clinic overall, and to calculate the contribution to fixed costs provided by each job.

1. What would someone think of the result of the budget for CASE 14-1 El Conejo Auto Clinic (A)

2. Produce a profit of $200,000, what options does Mr. Yianna have to effect the necessary change? The auto clinic currently has a $132,500 profit.

3. How, if at all, should Mr. Yianna change the process by which the budget is produced?

EL CONEJO AUTO CLINIC (B) Exhibit 1. Operating Budget Muffler Brake Lube and Replacement Tune-Up Replacement Oil Change Overall Budget Total 6,500 Number of jobs Price per job Total revenue 3,000 $200.00 $600,000 2,000 $100.00 $200,000 1,000 $150.00 $150,000 500 $40.00 $20,000 $970,000 Variable expenses per job Total variable expenses $87.50 $262,500 $80.00 $160,000 $127.50 $127,500 $15.00 $7,500 557,500 $337,500 $40,000 $22,500 $12,500 Contribution Total fixed expenses $412,500 280,000 Profit $132,500 Variable Expense Detail Mechanics Average # of minutes per job Average wage per minute Total expense per job 10 20 20 $0.50 $10.00 $0.50 $5.00 $0.50 $10.00 $0.50 $2.50 30 Mechanic Assistants Average # of minutes per job Average wage per minute Total expense per job $0.25 $7.50 20 $0.25 $5.00 30 $0.25 $7.50 10 $0.25 $2.50 Supplies Average # of units per job Average expense per unit Total expense per job $25.00 $25.00 $10.00 $40.00 $10.00 $80.00 $2.50 $10.00 Testing Average # of tests per job Average expense per test Total expense per job $15.00 $45.00 $15.00 $30.00 $15.00 $30.00 $15.00 $0.00 Total variable expense per job $87.50 $80.00 $127.50 $15.00