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16 November, 05:42

Qwik Service has over 200 auto-maintenance service outlets nationwide. It provides primarily two lines of service: oil changes and brake repair. Oil change-related services represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair represent 25% of its sales and provides a 60% contribution margin ratio. The company's fixed costs are $12,000,000 (that is, $60,000 per service outlet). InstructionsA. 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 $45,000 per service outlet. What is the dollar amount of each type of service that must be provided by each service outlet to meet its target net income per outlet?

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  1. 16 November, 09:04
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    A. The answer is:

    Oil-related revenue = 0.75 x 40,000,000 = $30,000,000;

    Repair-related revenue = 0.25 x 40,000,000 = $10,000,000

    B. The answer is:

    Oil-related revenue = 0.75 x 350,000 = $262,500;

    Repair-related revenue = 0.25 x 350,000 = $87,500.

    Explanation:

    A.

    Denote X is the total revenue Qwik Service has to earn.

    We have:

    Oil charge-related revenue: 0.75X; Oil charge-related margin 0.2 x 0.75X = 0.15X

    Brake repair-related revenue: 0.25X; Brake repair-related margin: 0.25X x 0.6 = 0.15X.

    => Total contribution margin = 0.15X + 0.15X = 0.3X

    To meet break-even, the total contribution margin should be equal to fixed cost or: 0.3X = 12,000,000 X = $40,000,000

    => Oil-related revenue = 0.75 x 40,000,000 = $30,000,000;

    Repair-related revenue = 0.25 x 40,000,000 = $10,000,000.

    B.

    The note Y is the total revenue per one outlet.

    At one outlet, revenue and margin will be:

    Oil charge-related revenue: 0.75X; Oil charge-related margin 0.2 x 0.75X = 0.15X

    Brake repair-related revenue: 0.25X; Brake repair-related margin: 0.25X x 0.6 = 0.15X.

    => Total contribution margin = 0.15X + 0.15X = 0.3X

    To meet net income target of $45,000, the total contribution margin should be equal to fixed cost of $60,000 and delivering $45,000 net income or: 0.3X = 45,000 + 60,000 X = $350,000.

    => Oil-related revenue = 0.75 x 350,000 = $262,500;

    Repair-related revenue = 0.25 x 350,000 = $87,500.
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