Question

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 60% of its sales and provide a contribution margin ratio of 20%. Brake repair represents 40% of its sales and provides a 45% contribution margin ratio. The company’s fixed costs are $15,579,000 (that is, $77,895 per service outlet). (a) Calculate the dollar amount of each type of service that the company must provide in order to break even.

Answer 1

Dollar amount of oil changes=$31,158,000

Dollar amount of brake repairs=$20,772,000

Step-by-step explanation:

Calculation for the dollar amount of each type of service that the company must provide in order to break even.

First step is to find the Total contribution margin for both Oil changes and Brake repairs

Sales 60% 40%

Contribution margin 20% 45

Oil changes Brake repairs

Contribution margin

12%(60%×20%) 18%(40%×45%)

Total contribution margin =30%

(12%+18%)

Second step is to calculate for the Break-even point

Using this formula

Break-even point =Fixed cost/Contribution margin

Where,

Fixed cost =$15,579,000

Contribution margin=30%

Let plug in the formula

Break-even point =$15,579,000/0.30

=$51,930,000

Third step is to calculate for the Dollar amount of oil changes and Brake repairs

Using this formula

Dollar amount of oil changes=Break-even point×Oil changes Sales percentage

Let plug in the formula

Dollar amount of oil changes =($51,930,000×60%)

Dollar amount of oil changes=$31,158,000

Dollar amount of brake repairs

Using this formula

Dollar amount of brake repairs=Break-even point× brake repair Sales percentage

Let plug in the formula

Dollar amount of brake repairs=$($51,930,000×40%)

Dollar amount of brake repairs=$20,772,000

Therefore the Dollar amount of oil changes will be $31,158,000 while the Dollar amount of brake repairs will be $20,772,000.