Question

E6.7 (LO2). AN Service PDQ Repairs has 200 auto-maintenance service outlets nationwide. It performs primarily two lines of service oil changes and brake repair. Oil change-related services represent 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 40% contribution margin ratio. The company's fixed costs are $15,600,000 (that is, $78,000 per service outlet). Compute service line break-even point and target net income in dollars for a company with more than one service Instructions a. Calculate the dollar amount of each type of service that the company must provide in order to break oven. b. The company has a desired not income of $52,000 per service outlet. What is the dollar amount of each type of service that must be performed by each service outlet to meet its target net income per outlet?

Answer 1

BC 1 a. 3 Contribution margin ratio 4 Sales mix 5 Weighted average contribution margin ratio Oil Changes 20% 70% 26% Brake Repair 40% 30% $15,600,000 7 Fixed cost of company Break-even dollars for company (Fixed costs/Weightedranpntribution margin 8 ratio) $60,000,000 Oil Changes $42,000,000 Brake Repair $18,000,000 11 Break-even dollars for each service 13 b. 14 15 Contribution margin ratio 16 Sales mix 17 Weighted average contribution margin ratio Oil Changes Brake Repair 20% 40% 70% 30% 26% $78,000 $52.000 19 Fixed cost per service outlet 20 Desired profit per service outlet Target sales per service outlet {(Fixed cost + Desired profit)/Weighted average 21 contribution margin ratio) $500,000 Oil Changes $350,000 Brake Repair $150,000 24 Target sales per service outlet for each service

Calculations are shown below: А 1 a 0.2 3 Contribution margin ratio 4 Sales mix 5 Weighted average contribution margin ratio Oil Changes Brake Repair 10.4 10.7 0.3 =(B3*B4)+(C3*C4) 15600000 7 Fixed cost of company Break-even dollars for company (Fixed costs/Weighted average contribution 8 margin ratio) =B7/B5 10 Oil Changes =B8*B4 Brake Repair =B8*C4 11 Break-even dollars for each service Oil Changes Brake Repair 13 6. 14 15 Contribution margin ratio 16 Sales mix 17 Weighted average contribution margin ratio 10.4 0.7 10.3 =(B15*B16)+(C15*C16) 18 78000 52000 19 Fixed cost per service outlet 20 Desired profit per service outlet Target sales per service outlet {(Fixed cost + Desired profit)/Weighted average 21 contribution margin ratio =(B19+B20)/B17 Oil Changes =B21*B16 Brake Repair =B21*C16 24 Target sales per service outlet for each service