Question

a) Barnes Company reports the following operating results for the month of August: sales $300,000 (units 5,000); variable costs $225,000; and fixed costs $71,400. Management is considering the following independent courses of action to increase net income.

Compute the net income to be earned under each alternative.

1. Increase selling price by 10% with no change in total variable costs or sales volume.

$

2. Reduce variable costs to 56% of sales.

$

3. Reduce fixed costs by $24,000.

$

Which course of action will produce the highest net income

b) 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 25%. Brake repair represents 40% of its sales and provides a 45% contribution margin ratio. The company’s fixed costs are $15,589,200 (that is, $77,946 per service outlet).

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____

The company has a desired net income of $49,995 per service outlet. What is the dollar amount of each type of service that must be performed by each service outlet to meet its target net income per outlet? (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____

Answer 1

• Question [a], along with workings

		Current Situation	Requirement 1	Requirement 2	Requirement 3
A	Sales	$300,000	$330,000	$300,000	$300,000
B	Variable Costs	$225,000	$225,000	$168,000	$225,000
C = A - B	Contribution margin	$75,000	$105,000	$132,000	$75,000
D	Fixed Cost	$71,400	$71,400	$71,400	$47,400
E = C- D	Net Income [Answer]	$3,600	$33,600	$60,600	$27,600

--Calculations

		Current Situation	Requirement 1	Requirement 2	Requirement 3
A	Sales	300000	=300000 + 10%	300000	300000
B	Variable Costs	225000	225000	=300000*56%	225000
D	Fixed Cost	71400	71400	71400	=71400-24000

• Question [b]

--Working

Working		Oil Change	Brake Repair
A	% of Sales	60.00%	40.00%
B	CM ratio	25.00%	45.00%
C= A x B	Weighted Average CM ratio	15.00%	18.00%

--Requirement 1

A	Fixed Cost	$    15,589,200.00
B = 15% + 18%	Total Weighted Average CM Ratio	33%
C = A/B	Total Break Even Sale	$    47,240,000.00
D = C x 60%	Oil Change	$   28,344,000.00
E = C x 40%	Brake Repair	$   18,896,000.00

--Requirement 2

A	Fixed Cost	$    15,589,200.00
B = $ 49995 x 200 outlets	Desired Net Income	$      9,999,000.00
C = A + B	Total Contribution margin required	$    25,588,200.00
D	Total Weighted Average CM Ratio	33%
E = C/D	Total Sales required for earning desired net income	$          77,540,000
F = E x 60%	Oil Change	$         46,524,000
G = E x 40%	Brake Repair	$         31,016,000