Question

CVP analysis, income taxes. Westover Motors is a small car dealership. On average, it sells a car for $32,000, which it purchases from the manufacturer for $28,000. Each month, Westover Motors pays $53,700 in rent and utilities and $69,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of $400 for each car they sell. Westover Motors also spends $10,500 each month for local advertisements. Its tax rate is 40%. Required: 1. How many cars must Westover Motors sell each month to break even? 2. Westover Motors has a target monthly net income of $69,120. What is its target monthly operating income? How many cars must be sold each month to reach the target monthly net income of $69,120?

Answer 1

To break even, Westover Motors needs to sell at least 34 cars per month. To reach a target monthly net income of $69,120, Westover Motors needs to sell at least 63 cars per month.

Step-by-step explanation:

In order to calculate the break-even point, we need to consider the fixed costs and the contribution margin per unit. The fixed costs include rent and utilities, salespeople's salaries, and local advertisements. The contribution margin per unit is the difference between the selling price and the variable cost per unit.

1. To break even, Westover Motors needs to cover its fixed costs. The fixed costs per month are $53,700 + $69,000 + $10,500 = $133,200. The contribution margin per unit is $32,000 - $28,000 = $4,000. Therefore, Westover Motors needs to sell $133,200 / $4,000 = 33.3 cars per month to break even. Since you cannot sell a fraction of a car, the dealership needs to sell at least 34 cars each month to break even.

2. To calculate the target monthly operating income, we need to add the net income to the fixed costs. The net income is the target monthly net income divided by (1 - tax rate). The tax rate is 40%, so the net income is $69,120 / (1 - 0.40) = $115,200. The target monthly operating income is $115,200 + $133,200 = $248,400. The contribution margin per unit is still $4,000, so Westover Motors needs to sell $248,400 / $4,000 = 62.1 cars per month, which rounds up to 63 cars.