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 $10,500, Depreciation on equipment $7,000, Wages $16,350, and Motor Oil which is $1.50 per quart. He estimates that each oil change will require 5 quarts of oil, and one oil filter, which cost $2.00 per filter. Additionally, he must also pay The Fast n Clean Corporation a franchise fee of $1.25 per oil change, since he will operate the business as a franchise.

Finally, utility costs are expected to behave in relation to the number of oil changes as follows:

Number of Oil Changes Utility Costs

5,000 $ 7,200

6,000 $ 7,300

9,000 $ 9,600

11,000 $12,600

13,000 $15,600

Bill Braddock anticipates that he can provide the oil change service with a filter at $30 each.

Instructions

(A) Using the high-low method, determine the per unit variable cost related to utilities, as well as the fixed cost related to utilities.

Per unit variable cost = $1.05

Fixed costs = $1,950

(B) Determine the break-even point in number of oil changes (units) and in sales dollars. (Use all fixed and variable costs identified in the first paragraph, including the variable cost per unit and fixed costs related to utilities, found in part a). Round the number of oil changes to the nearest whole number.

(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 $40,000 and the contribution margin per unit is $10.

2. Match the items in the two columns below by entering the appropriate code letter in the space provided.

A. Activity index F. Mixed costs

B. Variable costs G. Break-even point

C. Fixed costs H. Contribution margin

D. High-low method I. Margin of safety

E. Relevant range J. Contribution margin ratio

____ 1. The amount of revenue remaining after deducting variable costs.

____ 2. Costs that contain both a variable and a fixed element.

____ 3. The percentage of sales dollars available to cover fixed costs and produce income.

____ 4. Identifies the activity which causes changes in the behavior of costs.

____ 5. The difference between actual or expected sales and sales at the break-even point.

____ 6. Costs that vary in total directly and proportionately with changes in the activity level.

____ 7. The level of activity at which total revenues equal total costs.

____ 8. The range over which the company expects to operate during the year.

____ 9. Costs that remain the same in total regardless of changes in the activity level.

____ 10. A method that uses the total costs incurred at the high and low levels of activity.