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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. 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.)
Expert Solution
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 | ||||||
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