Question

Sanborn Motors is a small car dealership. On average, it sells a car for $29,000, which it purchases from the manufacturer for $25,000. Each month, Sanborn Motors pays $59,800 in rent and utilities and $72,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of $800 for each car they sell. Sanborn Motors also spends $9,000 each month for local advertisements. Its tax rate is 40%.  

Requirement 1

How many cars must Sanborn Motors sell each month to break even?

Requirement 2

Sanborn Morots has a target monthly net income of $57,600. What is the targeted monthly operating income? How many cars must be sold each month to reach the target monthly net income of $57,600?

Answer 1

• All working forms part of the answer
• Working #1

A	Sale price per car		$29,000
	Variable purchase cost per car	$25,000
	Commission per car	$800
B	Total variable cost per car		$25,800
C = A - B	Contribution margin per car		$3,200

• Working #2

Rent & Utilities	$59,800
Salesperson Salaries	$72,000
Local advertisements	$9,000
Total Fixed Cost	$140,800

• Requirement 1

Answer= 44 cars

A	Total Fixed Cost	$140,800
B	Contribution margin per car	$3,200
C= A/B	Break Even in no. of cars	44

• Requirement 2

--Net Income targeted is $ 57,600
--Tax Rate is 40%. Hence above Net Income would be = Operating Income – (Operating Income x 40%)
--Operating Income = Net Income after tax / (100% - tax rate ) = 57600 / 60% = $ 96,000

Answer: Operating Income = $ 96,000

A	Target Net Income [before tax]	$96,000
B	Total Fixed Cost	$140,800
C = A+B	Total Contribution margin required to earn target Income	$236,800
D	Contribution margin per car	$3,200
E = C/D	No. of cars required to be sold = Answer	74