Question

In: Finance

Eric wants to start a car detailing business but is unsure how many cars he will...

Eric wants to start a car detailing business but is unsure how many cars he will need to detail before making a profit. His cousin has offered to let him use a small section of his shop for only $300 per month. Eric is going to pay his friend $10/hour to help him. He has estimated his additional expenses and other details to be the following:

Insurance $200/month
His share of monthly utilities $95
Wax (will yield 10 cars) $19.00
Towels, soap, and other supplies $3.00/vehicle
Leasing of equipment $100/month
Marketing $105/month budgeted
He estimates that it will take him 4.5 hours to detail a vehicle if he has help from his friend.
He plans to charge $90 per vehicle.

Question - How many vehicles does Eric need to detail each month to break even?

Scenario 2

Eric is now considering leaving his full-time job to grow his car detailing business but he does not want to lose his salary.

Question- if he decides to pay himseld $2000 per month how many cars does he have to detail to break even?

Expert Solution

Scenario 1

The number of vehicles needed each month to break even is calculated as follows:

Break Even Vehicles = Total Fixed Cost/(Price - Variable Cost)

Here,

Total Fixed Cost = Rent + Insurance + Utilities + Leasing of Equipment + Marketing = 300 + 200 + 95 + 100 + 105 = $800

Price = $90 per vehicle

Variable Cost = Cost of Friend's Services + Wax + Towels, Soap, and Other Supplies = 4.5*10 + 19/10 + 3 = $49.9 per vehicle

Substituting these values in the above formula, we get,

Break Even Units = 800/(90 - 49.90) = 19.95 or 20 vehicles

______

Scenario 2:

The number of vehicles needed each month to break even is calculated as follows:

Break Even Vehicles = (Total Fixed Cost + Profit Desired)/(Price - Variable Cost)

Here,

Total Fixed Cost = Rent + Insurance + Utilities + Leasing of Equipment + Marketing = 300 + 200 + 95 + 100 + 105 = $800

Profit Desired = $2,000

Price = $90 per vehicle

Variable Cost = Cost of Friend's Services + Wax + Towels, Soap, and Other Supplies = 4.5*10 + 19/10 + 3 = $49.9 per vehicle

Substituting these values in the above formula, we get,

Break Even Units = (800 + 2,000)/(90 - 49.90) = 69.83 or 70 vehicles

jeff jeffy answered 1 year ago

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