Question

3. Mr. Taylor owns a service station in Palapye. Taylor is considering leasing a machine that will allow him to offer customers the mandatory emissions test. Every car in the country must be tested every two years. The machine costs P6 000 per month to lese. The variable cost per test (i.e. per car inspected) is P10. The amount that Taylor can charge each customer is set by the Law, and is currently P40. a) How many inspections would Mr. Taylor have to perform monthly to break even from this part of his business? (3 marks) b) How many inspections would Taylor have to perform monthly to generate a profit of P3 000 from this part of his business? (3 marks)

Answer 1

Computation of Break even point

Break even point = Total Fixed Cost / (Selling price p.u. - Variable cost p.u.)

= 6000* / (40-10)

= 6000 / 30

= 200 inspections per month

* Fixed cost is the cost of lease per month of the machine

Computation of number of inspections required to earn profit of Rs. 3000

No of inspections required = (Total fixed cost + Required profit) / (Selling price p.u. - Variable cost p.u.)

= (6000 + 3000) / (40-10)

= 9000 / 30

= 300 inspections per month