“Question 1 (10 marks)
Vaughan Speed Clean budgeting
The Vaughan Speed Clean company is a young company that operates three car wash
locations in the Greater Toronto Area. The owner relies on the abilities of
three managers to run the car wash locations. At the end of each quarter, the
owner evaluates the performance of each car wash location. His evaluations
determine the size of the location managers bonus. If the location achieves an
annual ROA of 10%, the location manager gets $1,000 for the quarter. The bonus
is also augmented by $1 for every $10 the location exceeds its profit target.

Return on assets (ROA) is the measure of profit earned before interest expense in
relation to the assets employed by an entity. It is calculated by expressing
net income as a percentage of average total assets. The term is similar to
return on investment.
However,
the bonus contract gives the owner the right to make subjective adjustments for
the effects of factors he deems outside the control of the location managers. In
the past few months, he has made such adjustments for the adverse effects on
revenue of having city workers repaving the street just in front of one car
wash location.
By far
the largest uncontrollable factor that is regularly considered is the weather.
In particular, sales volume decreases sharply when it rains or snows. The
budget, which is updated at the beginning of the month, is prepared on an
assumption of hours of good weather. Inevitably, those assumptions are not
accurate.
The last
quarter of 2013 was atypical. It snowed and rained many more hours than were
assumed in the budget, and actual profits for the three locations were below
the budgeted profit level. The results for the Jane-HW7 location are shown in
Exhibit 1. Exhibit 2 shows some operating assumptions and statistics for the
quarter. The Jane-HW7 location has an average of $200,000 of total assets and
is open every day, 10 hours per day, when it is not raining. When it is
raining, the car wash is closed. The car wash employees are paid the legally
required minimum wage plus a fixed amount for each car wash completed, so
labour costs are highly variable with revenues.
Exhibit 1:
Profit compared to budget for Jane-HW7 Last quarter 2013

Budget1

Actual

Variance

Revenue

$184,000

$120,555

$63,445 U

Variable expenses, including wages
(50% of revenues)

92,000

60,277

31,723 F

Fixed expenses

53,820

55,000

1,180 U

Total expenses

145,820

115,277

30,543 F

Profit

$ 38,180

$ 5,278

$32,902 U

1Based on 800 hours of good weather
Exhibit 2:
Operating statistics for Jane-HW7 Last quarter 2013

Budgeted

Actual

Average number of vehicles washed in a good weather hour

23

27

Average revenue per vehicle

$10

$9.50

Total hours in quarter

920

920

Hours of bad weather

120

450

Hours of good weather

800

470

Required
a. How large will the bonus be for the Jane-HW7 manager for the last
quarter of 2013?
b. Was the Jane-HW7 location properly managed in the last quarter?
Your answer should consist of variance calculations (based on information
provided in Exhibit 2) and an assessment of which variances are controllable.
Question 1 (10 marks)Vaughan Speed Clean budgetingThe
Vaughan Speed Clean company is a young company that operates three car wash
locations in the Greater Toronto Area. The owner relies on the abilities of
three managers to run the car wash locations. At the end of each quarter, the
owner evaluates the performance of each car wash location. His evaluations
determine the size of the location managers bonus. If the location achieves an
annual ROA of 10%, the location manager gets $1,000 for the quarter. The bonus
is also augmented by $1 for every $10 the location exceeds its profit target.Return on
assets (ROA) is the measure of profit earned before interest expense in
relation to the assets employed by an entity. It is calculated by expressing
net income as a percentage of average total assets. The term is similar to
return on investment.However,
the bonus contract gives the owner the right to make subjective adjustments for
the effects of factors he deems outside the control of the location managers. In
the past few months, he has made such adjustments for the adverse effects on
revenue of having city workers repaving the street just in front of one car
wash location.By far
the largest uncontrollable factor that is regularly considered is the weather.
In particular, sales volume decreases sharply when it rains or snows. The
budget, which is updated at the beginning of the month, is prepared on an
assumption of hours of good weather. Inevitably, those assumptions are not
accurate.The last
quarter of 2013 was atypical. It snowed and rained many more hours than were
assumed in the budget, and actual profits for the three locations were below
the budgeted profit level. The results for the Jane-HW7 location are shown in
Exhibit 1. Exhibit 2 shows some operating assumptions and statistics for the
quarter. The Jane-HW7 location has an average of $200,000 of total assets and
is open every day, 10 hours per day, when it is not raining. When it is
raining, the car wash is closed. The car wash employees are paid the legally
required minimum wage plus a fixed amount for each car wash completed, so
labour costs are highly variable with revenues.Exhibit 1:
Profit compared to budget for Jane-HW7 Last quarter 2013 Budget1ActualVariance Revenue$184,000$120,555$63,445 UVariable expenses, including wages
(50% of revenues)92,00060,27731,723 FFixed expenses53,82055,0001,180 UTotal expenses145,820115,27730,543 FProfit$ 38,180$ 5,278$32,902 U1Based on 800 hours of good weatherExhibit 2:
Operating statistics for Jane-HW7 Last quarter 2013 BudgetedActual Average number of vehicles washed in a good weather hour2327Average revenue per vehicle$10$9.50Total hours in quarter920920Hours of bad weather120450Hours of good weather800470Requireda. How large will the bonus be for the Jane-HW7 manager for the last
quarter of 2013?b. Was the Jane-HW7 location properly managed in the last quarter?
Your answer should consist of variance calculations (based on information
provided in Exhibit 2) and an assessment of which variances are controllable. “