Question

Exercise 19-07 a-b (Video) Sheridan 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 $15,620,800 (that is, $78,104 per service outlet). Calculate the dollar amount of each type of service that the company must provide in order to break even. (Use Weighted Average Contribution Margin Ratio rounded to 2 decimal places e.g. 0.25 and round final answers to 0 decimal places, e.g. 2,510.) Oil changes s Brake repairs The company has a desired net income of $54,990 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? (Use Weighted-Average Contribution Margin Ratio rounded to 2 decimal places e.g. 0.25 and round final answers to o decimal places, e.g. 2,510.) Oil changes Brake repairs Click if you would like to Show Work for this question: Open Show Work Question Attempts: 0 of 3 used SAVE FOR LATER SUBMIT ANSWER

Answer 1

Contribution margin ratio of oil change = 20%

Contribution margin ratio of brake repair = 40%

Sales mix = Oil change : Brake repair

= 70% : 30%

Weighted average Contribution margin ratio = Contribution margin ratio of oil change x Sales mix proportion of oil change + Contribution margin ratio of brake repair x Sales mix proportion of brake repair

= 20% x 0.7 + 40% x 0.3

= 14% + 12%

= 26%

1.

Break even sales in dollars = Fixed cost/Weighted average Contribution margin ratio

= 15,620,800/26%

= $60,080,000

Break even sales of oil change = Break even sales in dollars x Sales mix proportion of oil change

= 60,080,000 x 70%

= $42,056,000

Break even sales of brake repair = Break even sales in dollars x Sales mix proportion of brake repair

= 60,080,000 x 30%

= $18,024,000

2.

Target income per service outlet = $54,990

Fixed cost per service outlet = $78,104

Dollar Sales to earn target profit = (Fixed cost + Target profit)/Weighted average Contribution margin ratio

= (78,104 + 54,990)/26%

= 133,094/26%

= $511,900

Sales of oil change = Dollar Sales to earn target profit x Sales mix proportion of oil change

= 511,900 x 70%

= $358,330

Sales of brake repair = Dollar Sales to earn target profit x Sales mix proportion of brake repair

= 511,900 x 30%

= $153,570

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