Question

Biscayne's Rent-A-Ride rents two models of automobiles: the standard and the deluxe. Information follows: Rental price per day Variable cost per day Standard $ 70.00 19.60 Deluxe $82.00 24.60 Biscayne's total fixed cost is $33,294 per month. Required: 1. Determine the contribution margin per rental day and contribution margin ratio for each model that Biscayne's offers. (Round your "Unit Contribution Margin" answers to 2 decimal places.) Deluxe Standard per Day per Day Unit Contribution Margin Contribution Margin Ratio 2. Which model would Biscayne's prefer to rent? O Deluxe Model Standard Model 3. Calculate Biscayne's break-even point if the product mix is 50/50. (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Break-Even Point Rental Days 4. Calculate the break-even point of Biscayne's product mix changes so that the standard model is rented 75 percent of the time and the deluxe model is rented for only 25 percent. (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Break-Even Point Rental Days 5. Calculate the break-even point of Biscayne's product mix changes so that the standard model is rented 25 percent of the time and the deluxe model is rented for 75 percent. (Do not round intermediate calculations. Round your final answer to the nearest whole number.) Break-Even Point Rental Days

Answer 1

SOLUTION

1. Standard

Contribution margin per unit = The rental price - Variable cost

= $70 - $19.60 = $50.40

Contribution margin ratio = Contribution margin per unit / The rental price

= $50.40 / 70 = 72%

Deluxe

Contribution margin per unit = The rental price - Variable cost

= $82 - 24.60 = $57.40

Contribution margin ratio = Contribution margin per unit / The rental price

= $57.40 / 82 = 70%

2. The deluxe model would be preferred to rent as it has higher contribution margin.

3. The average contribution margin = ($50.40*50%) + ($57.40*50%)

= 25.20 + 28.7 = 53.90

Break even point = Fixed expenses / Average contribution margin

= $33,294 / 53.90 = 618 rental days

4. The average contribution margin = ($50.40*75%) + ($57.40*25%)

= 37.80 + 14.35 = 52.15

Break even point = Fixed expenses / Average contribution margin

= $33,294 / 52.15 = 638 rental days

5. The average contribution margin = ($50.40*25%) + ($57.40*75%)

= 12.60 + 43.05 = 55.65

Break even point = Fixed expenses / Average contribution margin

= $33,294 / 55.65 = 598 rental days