Question

You are a car thief. You steal late-model cars in a major U.S. city and drive them across the border to sell them for an average price of $10,000. You are enrolled in Ms. Smith’s managerial accounting class and you want to know if crime, indeed, does pay. So you calculate your costs thus:

~ on average, you drive 2,000 miles from start to destination. Your gas cost over the past year has averaged $3.00 a gallon, and most of the cars you drive get about 10 miles to the gallon.

~ each trip averages about 5 days. Your average cost per day of food and lodging is $30. 3) tips and bribes cost you about another $120 per job.

~ your major other cost comes from the “paint and body work” you must have done at the beginning of the job – your buddy Slade Slick charges you $3,500 per “conversion.”   

~ you also incur a “hiding out” cost between jobs – you stay in motels in the U.S. that average about $50 a day and your food cost comes to around $20/day. You spend about 9 days between jobs in your hideout mode.

~ your only other cost is lawyers’ fees – in the last year, you had to pay a lawyer $125,000 to defend you against felony theft charges. You estimate that you will probably caught, on the average, of once a year.

QUESTION:

a)What is your breakeven point in number of cars?

b) How many cars can you steal in one year if you take no vacation time?

c) You want to know if you should keep stealing cars or whether you should go to work for your brother, Honest Abe, for $10/hour.

d) how much money will you make, on average, in a year?

Answer 1

Computation of Break Even Point :

- Selling Price per car = $10,000

- Variable Costs per car :

Driving cost 2000/10*3 = $600

Food Costs 5*30 = $150

Tips and Bribe = $120

Conversion Cost = $3,500

Hide out cost (9d *70) = $ 630

Total Variable Costs = $5,000

- Contribution per car = Selling price - Variable Costs = 10000-5000=$5,000

- Fixed Cost per year = $125,000 ( lawyer's cost)

Break Even Point in units= Fixed Costs/Contribution= 125000/5000 = 25.

(b) Number of Cars to steal in a year

Assuming the time taken in stealing the car and converting it = 1 day

Hide out period = 9 days

Driving time = 5 days

Total period required for 1 car = 1+9+5= 15 days

Number of cars which can be stolen in a year = 24 (365/15, assuming 5 days in a year to be lost in lawyer proceedings)

(c) Since break even is 25 cars while the cars which can be stolen in a year equals 24, I am actully loosing money. So it is anytime better to leave this and join some work.

(d) Money to be made in a year = Amount Received from honest work + amount saved on avoding loss

assuming 40 hours week and 52 work weeks

= 40*52*8 + 5000 ( loss on 1 car , falling short of break even) =21,640