Question

O'Reilly Motors is a small car dealership. On average, it sells a car for $27,000, which it purchases from the manufacturer for $23,000. Each month, O'Reilly Motors pays $48,200 in rent and utilities and $68,000 for salespeople's salaries. In addition to their salaries, salespeople are paid a commission of $600 for each car they sell. O'Reilly Motors also spends $13,000 each month for local advertisements. Its tax rate is 40%. Read the requirements. Requirement 1. How many cars must O'Reilly Motors sell each month to break even? Let's begin by determining the formula for the breakeven number of cars. Breakeven number of cars = O'Reilly Motors must sell each month to break even. Requirement 2. O'Reilly Motors has a target monthly net income of $51,000. What is its targeted monthly operating income? How many cars must be sold each month to reach the target monthly net income of $51,000? Determine the formula to calculate the target operating income. C D -D Target = operating income The target monthly operating income is $ Finally determine the formula to calculate the number of cars that are required to be sold. Quantity of cars = required to be sold They would need to sell cars to reach the target monthly income of $51,000

Answer 1

Ans. 1	For the calculation of break even number of cars we need to find out the values of
	total fixed cost and contribution margin per car.
	*Calculations of total fixed cost:
	Particulars	Amount
	Rent and utilities	$48,200
	Sales people's salaries	$68,000
	Advertisements	$13,000
	Total fixed cost	$129,200
	*Total variable cost per car = Cost to manufacture + Selling commission
	$23,000 + $600   $23,600
	Contribution margin per car = Selling price per car - Variable cost per car
	$27,000 - $23,600
	$3,400	per car
	Break even number of cars =   Total fixed cost / Contribution margin per car
	$129,200 / $3,400
	38   cars
Ans. 2	Target operating income = Target net income / (1 - Tax rate)
	$51,000 / (1 - 0.40)
	$51,000 / 0.60
	$85,000
	The target monthly operating income is $85,000.
	Quantity of cars to be sold = (Fixed cost + Target operating income) / Contribution margin per car
	($129,200 + $85,000) / $3,400
	$214,200 / $3,400
	63 cars
	They would need to sell 63 cars to reach the target monthly income of $51,000.