Exercise 3-19

Andrew Sinclair operates a lawn care business. He offers customers a choice of two services. The first service, basic lawn care, includes mowing and trimming of all lawn areas. Andrew bills these customers $36 per hour, and his variable cost for providing this service is $20 per hour. Andrew also offers deluxe lawn care services which includes flower bed maintenance in addition to basic lawn care. He bills his customers $62 per hour for this service, and his variable cost for providing this service is $30 per hour. Andrew currently spends 1 hour of his time providing deluxe lawn care services for every 4 hours of basic lawn care services. Andrew also incurs $155,232 in fixed costs per year running his business.

What is Andrews profit equation? (Use contribution margin per hour to calculate the answer.)

$____x +____(____x) - $___= Operating income

B. How many hours of each service type must Andrew provide in a year to break even?

C. Andrew believes that with a little persuasion, he could convert many of his basic lawn care customers to the deluxe service. If he is able to convert enough customers so that he spends an equal amount of time providing basic and deluxe services, how many hours will he need to work to break even?