a. The manager of a car wash has to decide whether to have one or two carwash li

Question

a.

The manager of a car wash has to decide whether to have one or two carwash lines. Foe one line the fixed cost will be $ 6,000 per month, and the fixed cost for two lines will be $ 10,500 per month. Each line will be able to process 15 cars per hour. The variable costs will be $ 3 per car, and the revenue per car is estimated to be $ 5.95.

The manager projects that the average service demand will be between 14 and 18 cars per hour. The car wash will be open 300 days every year.

Would you recommend one or two lines?

Explanation / Answer

It is recommended to use one line based on the following workings

Revenue = $ 5.95

Variable Cost = $ 3

Profit Volume Ratio = (Revenue - Varible Cost)/Revenue

= (5.95-3)/5.95

= 0.496

Break Even Point = (Total Fixed Cost) / PV Ratio

For One Line = (6,000*12)/0.496 = $ 145,161

For Two Line = (10,500*12)/0.496 = $ 254,032

Assuming the Car Wash works for 8 hours a day below is the probability of the Revenue Earnings

As we can see from the above table the potential Total Revenue per year is less than the break even point of $ 254,032 for two car wash lines. Only in case the service demand is constantly at or above 18 cars per hour does it make sense to have two car lines.

Since the average service demand is between 14 and 18 cars per hour it makes business sense for the manager two have one car line and service 15 cars per hour for 8 hours a day over a period of 300 days a year.

Number of Cars/hour (A) 14 15 16 17 18 Revenue (B) $ 5.95 $ 5.95 $ 5.95 $ 5.95 $ 5.95 Revenue Per Hour (C) $ 83.3 $ 89.25 $ 95.2 $ 101.15 $ 107.1 Revenue per year (C*8*300) $ 199,920 $ 214,200 $ 228,480 $ 242,760 $ 257,040

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