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nydimaria [60]
3 years ago
13

Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes a

nd brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represent 25% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $12,000,000 (that is, $60,000 per service outlet).InstructionsA. 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 $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?
Business
1 answer:
Ann [662]3 years ago
6 0

Answer:

A. The answer is:

Oil-related revenue = 0.75 x 40,000,000 = $30,000,000;

Repair-related revenue = 0.25 x 40,000,000 = $10,000,000

B. The answer is:

Oil-related revenue = 0.75 x 350,000 = $262,500;

Repair-related revenue = 0.25 x 350,000 = $87,500.

Explanation:

A.

Denote X is the total revenue Qwik Service has to earn.

We have:

Oil charge-related revenue: 0.75X; Oil charge-related margin 0.2 x 0.75X = 0.15X

Brake repair-related revenue: 0.25X; Brake repair-related margin: 0.25X x 0.6 = 0.15X.

=> Total contribution margin = 0.15X + 0.15X = 0.3X

To meet break-even, the total contribution margin should be equal to fixed cost or: 0.3X = 12,000,000 <=> X = $40,000,000

=> Oil-related revenue = 0.75 x 40,000,000 = $30,000,000;

    Repair-related revenue = 0.25 x 40,000,000 = $10,000,000.

B.

The note Y is the total revenue per one outlet.

At one outlet, revenue and margin will be:

Oil charge-related revenue: 0.75X; Oil charge-related margin 0.2 x 0.75X = 0.15X

Brake repair-related revenue: 0.25X; Brake repair-related margin: 0.25X x 0.6 = 0.15X.

=> Total contribution margin = 0.15X + 0.15X = 0.3X

To meet net income target of $45,000, the total contribution margin should be equal to fixed cost of $60,000 and delivering $45,000 net income or: 0.3X = 45,000 + 60,000 <=> X = $350,000.

=> Oil-related revenue = 0.75 x 350,000 = $262,500;

    Repair-related revenue = 0.25 x 350,000 = $87,500.

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3-30 Operating leverage. Cover Rugs is holding a 2-week carpet sale at Josh’s Club, a local warehouse store. Cover Rugs plans to
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Answer:

The step by step answer to your problem is given below:

Explanation:

1A) Break even point for option 1:    

Sales- Variable cost= Fixed cost    

Q* $950-Q*$760= $7410    

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Operating income under Option 1 = $190Q - $7140

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We have to find Q such that $190Q - $7140 = $95Q

Q=$7410/$95= 78 Carpets

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For Q = 78 Carpets, operating income under both option 1 and 2 will be = $7410

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For Q > 78, say 79 carpets:

Option 1 gives operating income= (190*79) - 7410= $7600

Option 2 gives operating income= 95*79= $7505

So color rugs will prefer Option 1.

For Q < 78, say 77 carpets:

Option 1 gives operating income= (190*77) - 7410= $7220

Option 2 gives operating income= 95*77= $7315

So color rugs will prefer Option 2.

3. Calculate the degree of operating leverage at sales of 65 units for the two rental options.

Operating Leverage= \frac{Contribution margin}{Operating Income}

= Contribution margin per unit x Numbers of Carpet Sold= Contribution Margin

Under Option 1,

Contribution Margin per unit= $950-$760=$190,

Operating income= $190*65-$7410= $4940.

Degree of Operating Leverage= \frac{190*65}{6175}

=2.5

Under Option 2,

Contribution Margin per unit= $950-$760-$760-0.10*$950=$95,

Operating income= $95x65-$0= $6175.

\frac{95*65}{6175}

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4. Briefly explain and interpret your answer to requirement 3.

The degree of operating leverage helps managers calculate and anticipate the effects of fluctuations in sales on operating income. The calculation in requirement 3 show that when sales are 65 units, a % change in sales and contribution margin will result in 2.5 times that % change in operating income for option 1. But the same % change in Option 2 because there are no fix costs attached in option 2.

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Answer:

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Journal entry:

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Hope this helps!

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