Question 4:

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 $9,200, Depreciation on equipment $7,000, Wages $16,400, Motor oil $2.00 per quart. He estimates that each oil change will require 5 quarts of oil. Oil filters will cost $3.00 each. He must also pay The Fast n Clean Corporation a franchise fee of $1.10 per oil change, since he will operate the business as a franchise. In addition, utility costs are expected to behave in relation to the number of oil changes as follows:

Number of Oil Changes Utility Costs

4,000 $ 6,000

6,000 $ 7,300

9,000 $ 9,600

12,000 $12,600

14,000 $15,000

Bill Braddock anticipates that he can provide the oil change service with a filter at $25 each.

Instructions

(a) Using the high-low method, determine variable costs per unit and total fixed costs.

(b) Determine the break-even point in number of oil changes and sales dollars.

(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 $32,000 and the contribution margin per unit is $8.