Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He esti

Question

Bill Braddock is considering opening a Fast ‘n Clean Car Service Center. He estimates that the following costs will be incurred during his first year of operations: Rent $10,500, Depreciation on equipment $7,000, Wages $16,350, and Motor Oil which is $1.50 per quart. He estimates that each oil change will require 5 quarts of oil, and one oil filter, which cost $2.00 per filter. Additionally, he must also pay The Fast ‘n Clean Corporation a franchise fee of $1.25 per oil change, since he will operate the business as a franchise.

Finally, utility costs are expected to behave in relation to the number of oil changes as follows:

Number of Oil Changes                         Utility Costs

                                          5,000                                           $ 7,200

                                          6,000                                           $ 7,300

                                          9,000                                           $ 9,600

                                        11,000                                             $12,600

                                        13,000                                             $15,600

Bill Braddock anticipates that he can provide the oil change service with a filter at $30 each.

Instructions

A. Using the high-low method, determine the per unit variable cost related to utilities, as well as the fixed cost related to utilities.

B. Determine the break-even point in number of oil changes and in sales dollars. (Use all fixed and variable costs identified in the first paragraph, including the variable cost per unit and fixed costs related to utilities, found in part a). Round the number of oil changes to the nearest whole number.

C. Without regard to your answers in parts (a) and (b), determine the oil changes required to earn net income of $20,000, assuming fixed costs are $40,000 and the contribution margin per unit is $10.

Explanation / Answer

A. Using the high-low method,

= 15600 - 7200 / 13000 - 5000

Variable cost of utility per oil change = $1.05

Fixed cost of utility= 15600 - 13000 * 1.05 = $1950

B. The break-even point in number of oil changes and in sales dollars:

Contribution = 30 - (7.50 + 2 + 1.05) = 19.45

Bread Even Point = Total fixed cost/Contribution per unit = (10500 + 7000 + 16350 + 1950) / 19.45

= 1841 oil changes OR

   = $30 * 1841 = $55230

C. The oil changes required to earn net income of $20,000 = 40000 + 20000 / 10 = 6000 oil changes

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