Julie’s Cleaning Services is considering expanding its domestic cleaning operations to include the provision of carpet cleaning. This will require the purchase of 20 specialised carpet cleaning machines, at a cost of £400 each, to be used by the team of cleaners. The company will treat this expenditure as a fixed cost.

This is a large additional cost for the business, but Julie expects that the demand for this service is sufficient to warrant charging a fee of £75 per room carpet. The variable costs incurred per clean are £21 which include all labour and materials costs.

Required:

a) Calculate the number of carpet cleans that Julie’s Cleaning Services needs to carry out to avoid losing money on the new carpet cleaning activity.

b) The breakeven calculation carried out in part (a) required a number of assumptions to be made regarding the carpet cleaning business proposal. Discuss THREE (3) of the following assumptions, providing examples of where they may be valid, and where they may not be valid, in the situation facing Julie’s Cleaning Services.

• Fixed costs remain constant regardless of activity level

• Variable costs vary proportionately with activity

• Total costs and total revenue are linear functions of output

• There is no uncertainty

c) Julie is considering refining the pricing model for the carpet cleaning to allow for different sized room carpets (lower prices for smaller rooms). Describe, using a numerical example, how the calculations in part (a) will be amended to allow for this pricing model. 

Answer rating: 100% (QA)

Required a Total Fixed cost 400 20 8000 Contribution per activity of carpet clean 75 21 54 Break eve... View the full answer