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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 15%. Brake repair represents 40% of its sales and provides a 40% contribution margin ratio. The company’s fixed costs are $15,500,000 (that is, $77,500 per service outlet). Collapse question part (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 0 decimal places, e.g. 2,510.) Oil changes $ Brake repair $ Click if you would like to Show Work for this question: Open Show Work

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Answer:

The dollar amount of each type of service that the company must provide in order to break-even is $37,200,000 and $24,800,000 respectively.

Explanation:

For computing the break-even, first we need to calculate the Weighted-Average Contribution Margin Ratio for two services which is shown below:

Oil changes = Sales  ×  contribution margin ratio

                    = 60% × 15%

                    = 9%

Brake repair =  Sales  ×  contribution margin ratio

                    = 40% × 40%

                    = 16%

So, the total Weighted-Average Contribution Margin Ratio equal to

= 9% + 16%

= 25%

Now the total break even point in dollars would equal to

= (Fixed cost) ÷ (Total Weighted-Average Contribution Margin Ratio)

=  $15,500,000 ÷ 25%

= $62,000,000

For oil change = Total break even point in dollars × sales mix

                        = $62,000,000 × 60%

                        = $37,200,000

For break repair = Total break even point in dollars × sales mix

                           = $62,000,000 × 450%

                           = $24,800,000

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