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 60% of its sales and provide a contribution margin ratio of 15%. Brake repair represents 40% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are $15,680,000 (that is, $78,400 per service outlet).

The company has a desired net income of $51,000 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? (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.)

Answer 1

Oil change	$310,560
Break repair	$207,040

Explanation:

	Oil change	Break repair	total
Contribution margin ratio	15%	40%
weight in sales mix	60%	40%
weighted average contribution margin ratio	9%	16%	25%

Break-even point = (Fixed cost+ Desired profit) / Contribution margin

desired net income (a)	$51,000
fixed cost per outlet (b)	$78,400
required contribution margin (c) = (a) + (b)	$129,400
weighted average contribution margin ratio (d)	25%
required total sales per outlet (e) = (c) / (d)	$517,600

	Break even sales of each type	explanation
Oil change	$310,560	($517,600 x 60%)
Break repair	$207,040	($517,600 x 40%)