Reference no: EM13846780

QwikShare

QwikShare is a new not-for-profit organization that will rent low-emissions automobiles at QwikStops in suburban areas in order to provide an environmentally friendly transportation option to its customers. The organization plans to rent automobiles by the day only, and it will operate 7 days a week, 365 days per year.

On the first day of FY 2016, QwikShare will take out a pre-approved loan of $240,000. The loan will have an annual interest rate of 4%, with annual principal repayments of $30,000 per year to begin in FY 2017. Principal repayments and interest payments will be due the last day of each fiscal year. The organization will immediately use the loan to purchase its first fleet of 15 automobiles. Each automobile will be purchased for $16,000, will have a useful life of 7 years, and can be sold for $2,000 at the end of its useful life.

QwikShare will have full-time staffs that include a Chief Executive Office, a Chief Financial Officer, an Operations Manager, two customer service agents, and two automotive technicians. Full-time staff salaries will total $550,000 in FY 2016, and health benefits will equate to 30% of full-time staff salaries. The organization will also employ 10 part-time staff members who will earn an average of $12.50 per hour in wages and will work an average of 20 hours per week. QwikShare will lease its office and QwikStop spaces for $9,000 per month, it will use $1,000 per month in water and electrical utilities, and it will use $2,500 in supplies per month. In addition, the organization will incur $800 per month per automobile in maintenance and insurance expenses. QwikShare will also cover the cost of fuel at a discounted rate; the organization anticipates that it will cost $30 per car per day that a car is rented. All expenses will be paid as resources are consumed, except supplies, for which the organization will pay with a two-month lag.

In the first month of FY 2016, QwikShare expects supporters will pledge a total of $1,000,000 in donations to help support its first year of operations. QwikShare will charge $65 per day for an automobile rental, and rental fees are collected via pre-stored credit cards the moment customers enter the vehicles they have reserved. In addition, the organization will be supported by a new federal grant that will pay QwikShare $0.50 for every pound of carbon dioxide (CO2) emissions its rentals prevent during FY 2016. QwikShare estimates that each of its low-emissions automobiles will prevent 50 pounds of CO2 emissions per day they are in use during FY 2016. Revenues from the federal grant will be received with a one-month lag.

Using break-even analysis, calculate the minimum number of automobiles QwikShare must rent per day in FY 2016 in order to break even. (Hint: Since the problem is asking for the break-even volume of rentals “per day,” you should make certain all of your values for each variable are expressed accordingly.)

Note: There is no template for this assignment. To receive full credit for this problem, you must use Excel (not Word), use break-even analysis (not an operating budget), and carefully show each step of your calculation in solving this problem.

b. Using target profit analysis, calculate the minimum number of automobiles QwikShare must rent per day in FY 2016 in order to earn an annual profit of $109,500.

c. Prepare an annual operating budget for FY 2016, assuming the organization will rent 10 cars per day, on average, in FY 2016.

d. Prepare a quarterly cash budget for FY 2016 (showing each of the four quarters and the annual total), assuming the organization will rent 10 cars per day, on average, in FY 2016. Since this is a new organization, the beginning cash balance should be $0.

Do the reading assignment for the next class (Chapter 4 p. 136-end and Chapter 8 up to p. 283) and then answer the following reading comprehension question: Suppose that it is now the end of FY 2016 and QwikShare’s fuel expenses turned out to be significantly higher than expected. Briefly describe the three potential reasons why this unfavorable cost variance might have occurred. You may enter your answers in an Excel spreadsheet or in a Word document.