1. Business Finance Break Out Session
Ask the students
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2. Goals for Today Field Trip
Review Variable/Direct Costs Fixed/Overhead and
C.A.R. Cost Exercise
C.A.R. Profit and Loss Statement

3. Field Trip Takeaways
General
Finance-related

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

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

9. Total Variable Costs Depend on Volume
Number of units 50,000 75, ,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?

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

11. 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.
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12. 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

13. 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.

14. 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

15. 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

16. 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.

17. 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.

18. Annual Overhead Costs C.A.R. - Cost (cont’d) Manager’s salary $35,000
Rent ,000
Property Taxes ,000
Office supplies ,000
Maintenance ,000
Insurance & Misc ,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.

19. 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.

20. 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

21. 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

22. 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

23. 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

24. 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?

25. 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

26. 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)

27. 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

28. Questions? Chuck’s Auto Rinse Thanks You!
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