Business Finance Break Out Session Ask the students © Career Partners, Inc. 2017-18

Goals for Today Field Trip Review Variable/Direct Costs Fixed/Overhead and C.A.R. Cost Exercise C.A.R. Profit and Loss Statement

Field Trip Takeaways General Finance-related

Cost Review & Exercise Fixed vs Variable Cost Direct vs Overhead Cost

Unit costs are provided Have class calculate total direct costs for each volume

Total Variable Costs Depend on Volume Number of units 50,000 75,000 100,000 Material costs $33,000 $49,500 $66,000 Labor costs $ 31,500 $47,250 $63,000 Other costs $ 2,500 $ 3,750 $ 5,000 Total variable costs $67,000 $100,500 $134,000 Total fixed costs $75,000 $75,000 $75,000 Fixed costs per unit $1.50 $1.00 $0.75 How do you calculate the fixed cost per unit?

Assume 10 cars are washed per hour! C.A.R. – Cost Exercise Assume 10 cars are washed per hour!

Direct Cost of a Car Wash Chuck’s Auto Rise – C.A.R. Direct Cost of a Car Wash Materials cost ?.?? Utility cost ?.?? Labor cost ?.?? Supplies cost ?.?? Total direct cost ?.?? Apply the concept of direct and overhead costs to a car wash. The direct costs such as material costs (water, soap, utilities, etc.) with the labor costs (i.e. your detailing staff) and other costs (towels, window cleaner, tire shine, etc.) are added together to tally your total direct costs. Where do you get this information? If you had past records you could use those, but even that will not always be 100% accurate – many times it is just an educated estimate. © Career Partners, Inc. 2017-18

C.A.R. – Research Costs Determine who the vendor who supplies the material Inquire about the rates they charge for your specific needs Check with industry specialists about quantities of material needed for a specific product or service

C.A.R. - Material Costs Water $1.50 Soap $0.20 Wax $0.10 Tire cleaner Cost per Wash Water $1.50 Soap $0.20 Wax $0.10 Tire cleaner $0.05 Material cost per car wash $1.85 This is just an example of different types of material costs you may incur in a car wash – at this point, ask students if they can think of any more and ask for volunteers.

C.A.R. – Utility Costs Research the local commercial utility rate expressed in terms of kilowatt hours. $15 per kwhr / 10 cars per hour = Utility cost per car wash = $1.50

Labor costs for a detailer C.A.R. - Labor Costs Labor costs for a detailer Assume: Hourly rate incl. benefits = $12.50 Avg. detailer cleans 24 cars per 4-hr. day Now calculate the labor cost per car: 4 hours x $12.50 = $50.00 Labor costs include a lot things you might not think about – other than an hourly salary/pay. Are you offering benefits such as health care, dental, etc. – what are the laws.? What about paying taxes? Those all need to be combined together to get the labor cost – you take that and divide by the number of car washes during the time they are working. $50.00 / 24 cars = $2.08 Labor cost per car wash $2.08

C.A.R. - Other Costs Disposable paper floor mats $1.00 Cost per Wash Other costs per car wash You need to figure out what other direct costs are incurred in the business – air fresheners, floor mats, etc. and total those.

Direct/Product costs per car wash: C.A.R. - Cost Structure Direct/Product costs per car wash: Material cost $1.85 Utility cost $1.50 Labor cost $2.08 Other costs $1.00 Total direct/product cost per wash $6.43 Adding them up give you – your total product costs per wash. Remember this is what it costs YOU to provide the service to the customer.

Annual Overhead Costs C.A.R. - Cost (cont’d) Manager’s salary $35,000 Rent 20,000 Property Taxes 5,000 Office supplies 1,000 Maintenance 2,000 Insurance & Misc. 2,000 Total annual overhead costs $65,000 Then you need to figure out your overhead costs – remember these occur no matter how many washes you sell – so if you sell 5 or 100 washes, you still have these same overhead costs. Overhead costs per wash will change depending on how many you sell. The more you sell the less your overhead cost per wash.

C.A.R. - Cost (cont’d) How many washes are you going to sell each year? This will determine what your total annual direct costs will be. Let’s assume that we are going to wash 75,000 cars. What then would be the direct costs for those washes? 75,000 washes X $6.43 per wash or $482,250 Now we have to do a little math to figure out how to distribute the overhead cost – over the year and through each car we clean.

C.A.R. – Profit/Loss This will show on your P & L as follows, assuming you wash 75,000 cars at $8.00 per car: Sales $600,000 Direct Costs $482,250 Gross Profit Margin $117,750 (19.6%) If we washed fewer cars – what would happen to the price per wash? Overhead $ 65,000 Net Income $ 52,750

C.A.R. – Gross Profit Margin The importance of gross profit margin Usually expressed as a percentage of total revenue (sales) Once you know your gross profit margin, you can readily calculate expected net income using various sales projections Also allows quick calculation of “break even” point

C.A.R. – Profit/Loss Quiz If Chuck’s Auto Rinse cleans 125,000 cars, determine the following: Gross profit percentage Amount of gross profit Net profit assuming overhead does not change

C.A.R. – Profit/Loss Quiz Gross profit margin is unchanged at 19.6% Readily calculate the amount of gross profit - $1,000,000 x 19.6% = $196,000 Less fixed cost of $65,000 = Net income of $131,000

C.A.R. – Profit/Loss Quiz Is the net income of $131,000 good? What is the ROI? Did I forget to mention anything? Suppose the investment is $850,000 Can you now calculate ROI? What is the ROI now? Is that good or bad? What will your venture capitalists think?

C.A.R. – Break Even Point “Break even” means you’ve generated enough revenue to cover your direct variable costs and your fixed overhead cost – no profit/no loss Can be expressed in terms of dollar sales volume or number of units Simple calculation: Fixed overhead costs/gross profit margin $65,000/19.6% =$331,633 in sales

C.A.R. – Break Even Point So we can say that with sales of $331,633 per year, the business does not make a profit nor does it lose money Proof: Sales $331,633 Direct costs (266,633) Gross profit – 19.6% $ 65,000 Fixed overhead (65,000) Net income (loss) -

C.A.R. – Break Even Point We’ve just proven that with $331,633 in car washes, the business breaks even That’s “break even” point in terms of dollars. Sometimes it is more meaningful to express break even point in terms of units. Dividing our sales by price per car wash will get us the desired result $331,633/$8 = 41,454 car washes

Questions? Chuck’s Auto Rinse Thanks You! © Career Partners, Inc. 2017-18