Question

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).Instructions(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.(b) The company has a desired net 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

Answer:

For Break Even Point

Oil Change:    $ 210,000

Brake repair:  $   90,000

For target profit

Oil Change:    $ 350,000

Brake repair:   $ 150,000

Explanation:

Now, we solve for

the target mix:

sales weight times contribution ratio

0.70 x 0.20 + 0.30 x 0.4 = 0.26

Now we solve the break even point for each service outlet:

$\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}$

Oil Change: 78,000 / 0.26 = 300,000 sales revenue

we multiply by the weight to know eahc type of serivce sales revenue

Oil Change:   $ 300,000 x 0.7 = $ 210,000

Brake repair:  $ 300,000 x 0.3 = $  90,000

Now we solve for target profit:

(78,000 + 52,000) / 0.26 = 500,000

Oil Change:   $ 500,000 x 0.7 = $ 350,000

Brake repair:  $ 500,000 x 0.3 = $ 150,000