Question

Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $9,200, Depreciation on equipment $7,000, Wages $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast ‘n Clean Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows: Number of Oil Changes Utility Costs 100,000 4,000 $ 6,000 150,000 6,000 $ 7,300 225.000 $ 9,600 300,000 12,000 $12,600 14,000 $15,000 Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each. 9000 ya+bx ber writt 1000 15,000 = 0.90+ Instructions (a) Using the high-low method, determine variable costs per unit and total fixed costs. (b) Determine the break-even point in number of oil changes and sales dollars. (c) Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of $20,000, assuming fixed costs are $32,000 and the contribution margin per unit is $8.

Answer 1

a.

Variable utility cost = ($15,000 - $6,000) / (14,000 - 4,000) = $0.90

Fixed utility cost = $15,000 - (14,000 X $0.90) = $2,400

Total variable cost = ($2 X 5) + $3 + $1.10 + $0.90 = $15

Total fixed cost = $9,200 + $7,000 + $16,400 + $2,400 = $35,000

b.

Breakeven point in oil changes = $35,000 / ($25 - $15) = 3,500

Breakeven point in dollars = 3,500 X $25 = $87,500

c.

Number of oil changes required = ($20,000 + $32,000) / $8 = 6,500