Question

Biscayne’s Rent-A-Ride rents two models of automobiles: the standard and the deluxe. Information follows:

	Standard			Deluxe
Rental price per day	$	66.00		$	75.00
Variable cost per day		26.40			31.50

Biscayne’s total fixed cost is $24,200 per month.

Required:

1. Determine the contribution margin per rental day and contribution margin ratio for each model that Biscayne’s offers.

2. Which model would Biscayne’s prefer to rent?

3. Calculate Biscayne’s break-even point if the product mix is 50/50.

4. Calculate the break-even point if Biscayne’s product mix changes so that the standard model is rented 75 percent of the time and the deluxe model is rented for only 25 percent.

5. Calculate the break-even point if Biscayne’s product mix changes so that the standard model is rented 25 percent of the time and the deluxe model is rented for 75 percent.

Answer 1

Correct Answer:

1:

	Standard	Deluxe
Contribution margin	$ 39.60	$ 43.50
Contribution margin ratio	60.0%	58.0%

2: Biscayne’s will prefer Deluxe model to Rent, because it has higher contribution margin per unit.

3:

Breakeven point

582 units

4:

Breakeven point

596 units

5:

Breakeven point

569 units

Working:

1:

		Standard	Deluxe
A	Rental price	$                66.00	$                                        75.00
B	Variable cost	$                26.40	$                                        31.50
C=A-B	Contribution margin	$                39.60	$                                        43.50
D=C/A *100	Contribution margin ratio	60.0%	58.0%

3:

		Standard	Deluxe	Total
A	Rental price	$                66.00	$                                        75.00
B	Variable cost	$                26.40	$                                        31.50
C=A-B	Contribution margin	$                39.60	$                                        43.50
D=C/A *100	Contribution margin ratio	60.0%	58.0%
E	Sales mix	50%	50%
F=C*E	Weighted Average contribution margin	$                19.80	$                                        21.75	$              41.55
G	Fixed cost	$            24,200
H=G/F	Breakeven point	582

4:

		Standard	Deluxe	Total
A	Rental price	$                66.00	$                                        75.00
B	Variable cost	$                26.40	$                                        31.50
C=A-B	Contribution margin	$                39.60	$                                        43.50
D=C/A *100	Contribution margin ratio	60.0%	58.0%
E	Sales mix	75%	25%
F=C*E	Weighted Average contribution margin	$                29.70	$                                        10.88	$              40.58
G	Fixed cost	$            24,200
H=G/F	Breakeven point	596

5:

		Standard	Deluxe	Total
A	Rental price	$                66.00	$                                        75.00
B	Variable cost	$                26.40	$                                        31.50
C=A-B	Contribution margin	$                39.60	$                                        43.50
D=C/A *100	Contribution margin ratio	60.0%	58.0%
E	Sales mix	25%	75%
F=C*E	Weighted Average contribution margin	$                  9.90	$                                        32.63	$              42.53
G	Fixed cost	$            24,200
H=G/F	Breakeven point	569

End of answer.

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