Question

PDQ Repairs has 200 auto-maintenance service outlets nationwide. It performsprimarily two lines of service: oil changes and brake repair. Oil change–related servicesrepresent 70% of its sales and provide a contribution margin ratio of 20%. Brake repairrepresents 30% of its sales and provides a 40% contribution margin ratio. The company’sfi xed costs are $15,600,000 (that is, $78,000 per service outlet).Instructions(a) Calculate the dollar amount of each type of service that the company must provide inorder to break even.(b) The company has a desired net income of $52,000 per service outlet. What is the dollaramount of each type of service that must be performed by each service outlet to meetits target net income per outlet?

Answer 1

Answer:

(a) The answer is Sales of Oil change–related services is $42,000,000 while Sales of rake repair services is $18,000,000

(b) The answer is Sales of oil change services per an outlet = $350,000; Sales of brake repairs services per an outlet = $150,000

Explanation:

Denote x is the total Sales of PDQ Repairs

=> 0.7x is the sales of Oil change–related services while 0.3x is the Brake repair services.

=> 0.7x * 20% = 0.14x is the contribution of Oil change–related services while 0.3x * 40% = 0.12x is the contribution of Brake repair services.

(a)

To reach break-event point, total contribution must equal to total fixed costs:

=> 0.14x + 0.12x = 15,600,000 <=> 0.26x = 15,600,000 <=> x = 60,000,000

Thus, Sales of Oil change–related services is $42,000,000 while Sales of rake repair services is $18,000,000

(b)

The total desired net income = desired income by one outlet x number of outlets = 52,000 x 200 = $10,400,000

To reach total desired net income, total contribution must cover all the fixed cost and generate the level of profit meeting desire:

=> 0.14x + 0.12x = 15,600,000 + 10,400,000 <=> 0.26x = 26,000,000 <=> x = 100,000,000

=> Total sales of oil change services = $70,000,000; Total sales of brake repairs services = $30,000,000.

=> Sales of oil change services per an outlet = $350,000; Sales of brake repairs services per an outlet = $150,000 ( as there are 200 outlet).