Question

Exercise 6-7 (Video) 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 80% of its sales and provide a contribution margin ratio of 15%. Brake repair represents 20% of its sales and provides a 35% contribution margin ratio. The company’s fixed costs are $15,792,800 (that is, $78,964 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		$
Brake repair		$

The company has a desired net income of $54,986 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.)

Oil changes		$
Brake repair		$

Answer 1

Answer : Calculation of Breakeven Point :

Breakeven Sales = Fixed Cost / Weighted Average of Contribution

Weighted Average of the Contribution

	Oil Change	Brake Repair	Total
% sales	80%	20%
Contribution Margin	15%	35%
Weighted Contribution Margin	12%	7%	19%

Breakeven Sales = 15792800 / 0.19 = 83120000

Breakeven Sales of Oil Change = Breakeven Sales * 80%

= 66496000

Breakeven Sales of Brake Repair = Breakeven Sales * 20%

= 16,624,000

(b.) Calculation of Services to be performed by each service outlet

Breakeven Sales = (Fixed Cost + Desired Profit) / Weighted Contribution Margin

= (78964 + 54986) / 0.19

= 705000

Breakeven Sales of Oil Change = Breakeven Sales * 80%

= 564000

Breakeven Sales of Brake Repair = Breakeven Sales * 20%

= 141000