Question

O'Reilly Motors is a small car dealership. On average, it sells a car for $31,000, which it purchases from the manufacturer for $27,000. Each month, O'Reilly Motors pays $51,600 in rent and utilities and $73,000 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 $8,000 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 $65,280. What is its targeted monthly operating income? How many cars must be sold each month to reach the target monthly net income of $65,280? Determine the formula to calculate the target operating income. 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

Answer 1

1)Breakeven no of cars = total fixed cost monthly/contribution margin p.u
Contribution margin p.u = sellin price p.u-variable cost p.u
total variable cost = (27000+600) = 27600
Contriution margin p.u = (31000-27600) = 3400
Total fixed cost
rent & utilities			51600
salaries			73000
advertisment			8000
Total fixed cost			132600
Breakeven no of cars = 132600/3400 = 39
o reilly motors must sell 39 cars each month to breakeven
2) Target monthly operating income = target net income/(1-tax)
target monthly operating income = 65280/(1-0.40) = 108800
breakeven at desired profit = (total fixed cost+target operating income)/contribution margin
breakeven at desired profit = (132600+108800)/3400
breakeven at desired profit = 71 cars
They would need to sell 71 cars to reach the target monthly income of 65280

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