Alex Yianna, Administrator of El Conejo Auto Clinic, was in the process of preparing his budget for the upcoming fiscal year. He had obtained a great deal of information from his supervisory staff, and now it was up to him and his staff assistant to put the information together in a format that could be presented to the company’s board of directors.
El Conejo Auto Clinic had been formed over five years ago. Initially its only line of business was muffler replacements. As the quality of original equipment mufflers improved, and as Mr. Yianna realized that the company’s customers were interested in more than just muffler replacements, El Conejo expanded its product lines. Currently, the company offered four services (or “jobs,” as they frequently were called): muffler replacement, minor tune-up, major tune-up, and lube and oil change. The principal distinction between a minor and major tune-up was that with a minor tune-up the mechanics did not replace the spark plugs. Hence a minor tune-up required less time and fewer supplies than a major tune-up.
A distinctive feature of the clinic was its use of mechanic assistants. Since much of the work traditionally done by mechanics did not require the skill of a trained mechanic, Mr. Yianna realized that he could offer lower prices to his customers by having mechanics only perform those tasks that required their specialized skills. The remaining tasks were done by lower-skilled, and hence lower wage, mechanic assistants.
Another distinctive feature of the clinic was its testing function. Mr. Yianna had purchased some highly sophisticated equipment that allowed him to test the work of every job to make sure that there were no defects. The equipment that tested muffler replacement, for example, assessed the quality of the seals between the muffler and tailpipes to make sure that they would not rupture after only a few hundred miles of driving. Similarly, other equipment tested the timing of an engine following a tune-up.
Mechanics earned $30 per hour; mechanic assistants earned $15 per hour. Both figures included fringe benefits. For ease of computation, supplies were classified into “units.” Each job required a different number of units, and the units for different types of job cost different amounts each. For example, a supply unit for the Muffler Replacement job cost $25, whereas supply units for Minor and Major tune-ups cost only $10 each. For a Lube and Oil Change, the supply unit cost was $2.50. Testing was somewhat simpler, since each test cost an average of $15.
Exhibit 1 shows the supervisors’ collective projections for the annual volume for each of the clinic’s four jobs. It also shows, for each job, the budgeted price, minutes needed by mechanics and mechanic assistants, and the number of supply units and tests needed. The clinic also had fixed expenses of $280,000, none of which could be attributed to specific jobs.
- Prepare a budget according to the specifications provided by Mr. Yianna in the last paragraph of the case. Organize your figures so that they will be easily understandable by the board of directors.* What do you think of the results?
- Assuming the board has directed Mr. Yianna to revise the budget to produce a profit of $200,000 before taxes, what options does he have to effect the required changes? Which options seem the easiest to implement?
- How, if at all, should Mr. Yianna change the process by which the budget is prepared?
- Try to set up a spreadsheet to calculate the budget. Make it as formula-driven as possible. This will allow you to easily test assumptions in answering Question 2.