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Homework answers / question archive / Exercise 6-7 (Video) PDQ Repairs has 200 auto-maintenance service outlets nationwide

Exercise 6-7 (Video) PDQ Repairs has 200 auto-maintenance service outlets nationwide

Accounting

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 20%. Brake repair represents 20% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are $15,580,800 (that is, $77,904 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.)
 

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.)
 

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Part A

   

Sales Mix
Percentage
 

Contribution
Margin Ratio
 
Weighted-Average
Contribution
Margin Ratio
Oil changes   80 %   20 %   0.16
Brake repair   20 %   40 %   0.08
                0.24


Total break-even sales in dollars = $15,580,800 ÷ 0.24 = $64,920,000
 

   

Sales Mix
Percentage
 
Total
Break-even Sales
in Dollars
 
Sales Dollars
Needed
Per Product
Oil changes   80 %  ×  $64,920,000  =  $51,936,000
Brake repair   20 %  ×  $64,920,000  =  $12,984,000
Total sales             $64,920,000


[$15,580,800 ÷ ((80% x 20%) + (20% x 40%)) = $64,920,000]

(FC ÷ Wtd.-ave. CM ratio = Tot. BEP $)

[(80% x $64,920,000 = $51,936,000) + (20% x $64,920,000 = $12,984,000) = $64,920,000]

[(Oil changes sales mix % x Tot. BEP $ = Oil changes sales $ at BEP) + (Brake repair sales mix % x Tot. BEP $ = Brake repair $ at BEP) = Tot. BEP $]

Part B

Sales to achieve target net income = ($77,904 + $51,000) ÷ 0.24 = $537,100
 

   

Sales Mix
Percentage
 
Total
Sales Needed
 
Sales Dollars
Needed Per Product
Per Store
Oil changes   80 %  ×  $537,100  =  $429,680
Brake repair   20 %  ×  $537,100  =  $107,420
Total sales             $537,100