Nissan service center deals with 1,400,000 services annually. The fixed cost of

Question

Nissan service center deals with 1,400,000 services annually. The fixed cost of the center is $750,000 with an average variable cost of S2.5 and revenue of S4 per service 5. a) Find the marginal contribution per service. b) Find the percentage of the capacity that must be placed each year to break even cFind the total revenue at break-even using the marginal contribution equation d) The center manager expects to dedicate the equivalent of 500,000 services of the 1,400,000 capacity to a new service line. This is expected to increase the center's fixed cost to $00,000 of which 50% will be allocated to the new product line. Determine the average revenue per service necessary to make 500,000 service the breakeven point for only the new product. How does this required revenue compare with the current center revenue of $4 per service?

Explanation / Answer

Meaning of Marginal Contribution:- Marginal Contribution is defined as the Revenues minus Variable Expenses. In other words, marginal contribution is the amount of net revenues that is in excess of the variable expenses.

Answers:-

Part a:-

Average revenue per service = $4

Average variable cost per service = $2.5

So, Marginal Contribution per service = $4 - $2.5 = $1.5

Part b:-

Break Even is that point which is required to cover the total costs (Fixed + Variable). Break Even can be calculated in terms of units (quantity) as well as in revenue (sales/service) terms.

Break even can be calculated by dividing the Fixed costs by Contribution per service, i.e. Fixed Cost/Contribution per service.

Hence, Break even in the given question= 750000/1.5 = 5,00,000 services

Percentage of capacity that must be placed for break even = 500000/1400000 = 0.357, or 35.71%

Part c:-

Services required for break even (calculated in part b) = 5,00,000

Revenue per service = $4

So, total revenue at break even would be = $4*500000 = $20,00,000

Part d:-

Total services at full capacity = 14,00,000

Dedicated to new service line = 5,00,000

Balance services for present line = 9,00,000

Now, total fixed cost after implementation of new line = $9,00,000

Allocation to new line = $900000*50% = $4,50,000

So, using formula for calculating Break-even, we can find out contribution per service required for achieving 500000 services as break even of new line.

& Fixed Cost = 450000 ……. (calculated above)

So, Contribution per service = 450000/500000 = $0.9 per service

Further, Variable cost per service = $2.5 …. (given)

So, average revenue per service = $2.5 + $0.9 = $3.4 per service

Now,

Revenue per service for present line = $4 per service

Remaining services in the present line (after implementation of new line) = 9,00,000

So, total revenue of present line = 900000*4 = 36,00,000

And

Revenue of new line = 500000*3.4 = 17,00,000

So, Total revenue of center after implementation of new line = $3600000+$1700000 = $53,00,000

Hence, Revenue per service of the center = 53,00,000/14,00,000 = $3.79 per service

Therefore average revenue per service would be decreased by $0.21 per service as compared to current revenue of $4 per service

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