Problem 2: Profit Planning and Decision Making (10%)

B & C CARPET CLEANING SERVICES

In March 2017, Bob and Carol Finn started their carpet-cleaning services

business in Toronto. The business was geared primarily at young couples, a

market that they felt was growing rapidly. Bob and Carol had worked

during the previous 10 years as salaried employees for different types of organizations.

They were frustrated with the fact that their future was in the hands of employers, so

they decided to start B & C Carpet Cleaning Services. After 10 years of tremendous

success in the business, the couple decided to launch a franchise.

They placed advertisements in different daily newspapers across Canada promoting

the franchise business. Jerry and Ann Robinson of Ottawa saw the advertisement and

called B & C for information about the economics and advantages of managing a

carpet-cleaning franchise operation. The Finns provided the following information:

Average revenue for cleaning carpets in each household is $120.

A 20% sales commission per contract is secured by a sales representative.

Machine operators receive $30 for cleaning the carpets in each household.

Average costs for gas and maintenance for trucks for each household is $5.50.

Maintenance charges are $400 per machine for each 100 houses cleaned.

Monthly rental charges for office and small warehouse for inventories is

$1,200.

Annual depreciation for the equipment is $500.

Monthly salary paid to Jerry and Ann would total $3,500.

Other costs include the following:

A $1,400 monthly salary for office employees.

A $500 yearly expense for various insurance policies.

A $125 monthly expense for utilities and telephone.

A yearly $10,000 fee for the franchise.

A $5.00 franchise fee for each household cleaned.

Questions:

Based on the above information, calculate the following:

1. How many carpets would Jerry and Ann have to clean each year to start

making a profit?

2. How much revenue would they have to earn each year in order to

break even?

3. How many carpets would they have to clean each year if they want to

earn a yearly profit of $45,000 before tax?