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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 70% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 30% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are $15,600,000 (that is, $78,000 per service outlet).Instructions(a) Calculate the dollar amount of each type of service that the company must provide in order to break even.(b) The company has a desired net income of $52,000 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?

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TomShelby

Answer:

For Break Even Point

Oil Change:    $ 210,000

Brake repair:  $   90,000

For target profit

Oil Change:    $ 350,000

Brake repair:   $ 150,000

Explanation:

Now, we solve for

the target mix:

sales weight times contribution ratio

0.70 x 0.20 + 0.30 x 0.4 = 0.26

Now we solve the break even point for each service outlet:

[tex]\frac{Fixed\:Cost}{Contribution \:Margin \:Ratio} = Break\: Even\: Point_{dollars}[/tex]

Oil Change: 78,000 / 0.26 = 300,000 sales revenue

we multiply by the weight to know eahc type of serivce sales revenue

Oil Change:   $ 300,000 x 0.7 = $ 210,000

Brake repair:  $ 300,000 x 0.3 = $  90,000

Now we solve for target profit:

(78,000 + 52,000) / 0.26 = 500,000

Oil Change:   $ 500,000 x 0.7 = $ 350,000

Brake repair:  $ 500,000 x 0.3 = $ 150,000

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