Question

Blossom 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 $15,800,200 (that is, $79.001 per service outlet). Sales mix is determined based upon total sales dollars.

A) 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 O decimal places, e.g. 2,510.)
B) The company has a desired net income of $55.003 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.)

Answer 1

To break even, Blossom Repairs needs to provide $60,708,461.54 worth of oil change service and $117,841,538.46 worth of brake repair service.

Step-by-step explanation:

To calculate the dollar amount of each type of service Blossom Repairs must provide in order to break even, we need to determine the weighted-average contribution margin ratio. The weighted-average contribution margin ratio is the average of the contribution margin ratios for oil changes and brake repair, weighted by their respective sales percentages.

Weighted-average contribution margin ratio = (0.70 * 0.20) + (0.30 * 0.40) = 0.26

To break even, the company's fixed costs need to be covered by the contribution margin. Let X be the dollar amount of each type of service the company must provide. Since the contribution margin ratio is 0.26, we can set up the following equation: 0.26X = $15,800,200

Solving for X, the dollar amount of each type of service that the company must provide in order to break even is $60,708,461.54 for oil changes and $117,841,538.46 for brake repair.